Part I
We all know where the market has been going in the last couple of weeks. Financial advisors had their challenge managing client portfolios but even more so managing their clients’ psychological risk make up, panic and expectations for the future.
We all know and hear that we’ve been through this before, but it still doesn’t bring on a super- cozy comfy feeling because the question on everyone’s mind is when the market will recover. If the market goes down 40%, you have to wait for the market to come up about 66.7% in order to break even. And there’s no guarantee that what you own will appreciate in value.
I remember way back in 2000 when the market was tanking. I had a bunch of Microsoft and sold it off before I got married. Although I made some money with Microsoft, if I would’ve held it (famous last words), I would’ve made a lot more. It’s easy for me to say now, but it took a long time for that stock to really shoot up.
The key is, if you can wait it out, you don’t need to sell and you can hold off from selling, you can avoid paying any kind of capital gains or taking any kind of losses. Two options would be if you have a liquid savings or checking account and you have paid taxes on that money already, so you can draw on those accounts or you can use the dead equity in your home. You could take a regular mortgage and cash out or, if you’re 55 or older, you could take a reverse mortgage.
Let me tell you about one of the greatest mortgage financing tools we have today in this country; it’s called a reverse mortgage. Today’s reverse mortgage has a variety of options, lower costs and additional consumer protections in place to provide you and your family with more confidence for your retirement security.
HECM (home equity conversion mortgage) reverse mortgages offer a line of credit that you can tap into when you need it.The unused portion of your line of credit actually grows every month! You have the option to convert, at any time, to annuity-style monthly payments for a period of time or for the rest of your life, or you can just build in additional security and use it as a rainy-day account. Immediate cash flow can be created by paying off an existing mortgage loan. A reverse mortgage is now a versatile, safe and effective retirement planning tool to meet a variety of needs.
Just what exactly is a reverse mortgage?
A reverse mortgage is a way for borrowers age 62 or older (55 on some products) to purchase a property or unlock the equity in their home by turning it into tax-free cash (consult with your tax advisor) without having to make any monthly mortgage payments (real estate taxes and insurance must still be paid).
How do you qualify?
- The borrower on title must be 62 years or older. (A non-borrowing spouse may be under age 62.)
- The home must be the borrower’s primary residence.
- The borrower must purchase or own and live in the home as a primary residence
- Borrowers must continue paying property taxes and homeowners insurance, maintain the home and otherwise comply with the loan terms.
Let’s dispel the old financial myths:
Myth 1: Plan 10 to 15 Years Out.
Busted! Planning for 25 years of retirement is far more realistic because advances in medical care and healthier lifestyles extend the average lifespan of a single 65-year-old man by another 15 years and a woman’s by another 19 years. (Study averages are not guaranteed; only God gives years!)
Myth 2: Loyalty to and Retirement From One Company lLads to the Best Benefits.
Busted! Staying with one employer at lower pay only to increase your pension will reduce your retirement benefits. Changing employers may increase your salary, and retirement benefits from any fixed plan maintained by that company upon vesting. Even a raise of 5% could be enough to justify switching to a new job. Be aware that changing jobs too often may impact vesting requirements and prevent building large sums in fixed pension plans.
Myth 3: The Government Guarantees Pension Benefits.
Busted! If a company’s pension fails, the Pension Benefit Guaranty Corporation pays only a fraction of company benefits owed, possibly one-fifth. In addition, major benefits such as severance, vacation or sick pay are not covered and disappear if a company’s pension plan collapses. To be safe, check the safety of your employer’s retirement plan.
Myth 4: Preserve Your Capital.
Busted! Preserving your capital is a given, but more importantly, you hedge your buying power. Inflation rates of even 4.5% reduce the buying power of your income, so it becomes important to grow existing capital while generating additional income. How? By working part- time and staying within the Social Security earning limits while continuing to invest in growth assets. Don’t let retirement stop you from earning and saving.
Myth 5: Taxes are Lower When You Are Retired.
Busted! If income decreases, retirees may drop into a lower tax bracket. But if the effective tax rate, which has consistently risen, continues to rise, then you may pay more in taxes after retiring. Moral of the story: Retirement income may put you in a lower bracket, but don’t assume you’ll pay less taxes.
Myth 6: Social Security Will Fill the Hole.
Busted! Many people think that Social Security will cover the shortfall in their savings and retirement benefits. Some even think that Social Security will cover most of their retirement expenses. All I can say is “no way Jose.” The intent of Social Security was to meet basic retirement income needs. To maintain your current standard of living in retirement, studies indicate that you’ll need 70% to 80% of your old working salary. Social Security will most likely be around for a while but may have reduced benefits in the future.
Myth 7: Medical Bills Will Be Covered by Company Insurance and Medicare.
Busted! Under Medicare, you can’t collect until age 65, and they pay, on average, less than half of senior health care bills. The continuous and annual double-digit rise in insurance premium costs will push employers away from covering the high premium policies that future retirees currently get. Realistic and practical strategies would be to take care of your health, allocate some money for health insurance, and check out health maintenance organizations (HMOs).
Myth 8: Housing Costs Are Lower.
Busted! Even if your mortgage is paid off by the time you retire, you will still have to pay property taxes, hazard insurance, property maintenance and dues if you live in a co-op or condo, which are all expected to increase in cost. According to the Bureau of Labor Statistics, people 65 and older actually spend a greater percentage of income (31%) on housing than those between 45 and 64 (27%). Many retirees on fixed incomes are being forced out of their homes simply because of the ever-increasing property taxes and maintenance required to care for a property. Consider downsizing to a smaller property and/or reverse mortgage financing. You may lower housing costs with the possibility of walking away with some cash.
Traditional IRA and Roth 401(k) investment retirement accounts can be subject to taxation and may increase your tax liability once you start taking distributions. Examine your current retirement savings and consider additional benefits you expect to receive during retirement, like pensions, Social Security benefits, etc. You can then analyze and review your current asset allocations and expected retirement income, and estimate how long your savings will last.
Evaluating your reverse mortgage options by leveraging your home’s equity through a HECM reverse mortgage line of credit.
Carl Guzman, NMLS# 65291, CPA, is the founder and President of Greenback Capital Mortgage Corp. a Zillow 5-star lender and Residentialmortgageadvisor.com. http://www.zillow.com/profile/Greenback-Capital/Reviews/?my=y.
He is a residential financing expert and a deal maker with over 35 years’ industry experience. Carl and his team will help you get the best mortgage financing for your situation and his advice will save you thousands! www.greenbackcapital.com
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