In defense of equity consumption

By Laurie MacNaughton [NMLS ID #506562], as first published in Reverse Review, Oct 2017 edition. Reprinted with permission.

To be honest, the seminar topic was probate. But the two opening questions took my thoughts far afield.

“How many here want to leave their kids an inheritance?” Nearly every hand went up.

“How many here are likely to have an inheritance to leave?” Not as many hands went up. In fact, not many hands went up, period.

I sat through the Circuit Court judge’s talk scribbling down my churning thoughts, the foremost of which was this: not leaving kids an inheritance is one thing; having your kids bankroll you as you age is another thing altogether. If you’re the adult child of aging parents, zero inheritance can look great vis-à-vis the potential alternatives.

According to a Pew Research study, more than forty percent of adult children with a parent aged 65 or older helped that parent financially within the past year. If percentages remain constant, the number of adult children bankrolling parents is likely to get worse, a lot worse, because in little more than a decade one in five Americans will be 65 or older.

For many people, the go-to objection to a reverse mortgage is that the homeowner might not have equity left to leave the kids. But this is flawed reasoning.

If a homeowner with a reverse mortgage used all available funds, it is likely there were not other assets to draw from. This means each tax-free dollar the parent used did not come out of the kids’ post-tax income.

An alternate scenario is that the parent did indeed have other assets but did not want to consume those assets, which presumably will go to the kids. Under either scenario the kids are the big beneficiaries – every dollar of her own money Mom used was a dollar either the kids or the taxpayer did not pay out.

Of course, little or no remaining equity is by no means a foregone conclusion, particularly in light of FHA’s most recent changes to the product. But is it true there might not be equity left for the kids? Absolutely. The pertinent issue here is that the parent relieved the adult children from draining their own financial reserves – or at very least, delayed the time when the kids had to step in to help financially. And as boomers’ kids eventually edge toward their own retirement and the reduction in Social Security benefits impacts Millennials’ long-term financial plans, parents’ decisions are bound to become ever more conspicuous.

On a related note, for years I’ve thought it frankly odd how slow some financial professionals have been to amend their mindset about tapping into home equity, even as evidence mounts that homeowners with reverse mortgages tend to enjoy greater odds of financial survivability in retirement. If the popular press is to be believed, the needle does seem to be edging in the right direction, however.

Case in point: recently I met with a wealth manager who said to me, “Our holistic retirement planning includes reverse mortgages.” Moments later he went on to say, “Most of our clients want to leave their investments for their kids.”

Bingo. He has seen how a reverse mortgage can fit into the goal of leaving something for the kids.

This growing awareness is heartening news all around: as aging homeowners get more informed input on reverse mortgages, their adult children, the taxpayer, and the homeowner all stand to remain financially healthier in retirement.

Good news couldn’t come at a better time.

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Don’t freak – but do take note: big changes afoot

Laurie MacNaughton [NMLS ID#506562] © 2017

I am not an alarmist. I do, however, believe forewarned is forearmed.

This week FHA announced some of the most sweeping changes ever made to its reverse mortgage program: starting October 2, 2017 FHA’s reverse mortgage loan amounts will decrease, and most new reverse mortgage applicants will see higher upfront FHA mortgage insurance.

What does this mean? First and foremost it means that if your client, friend, or family member is looking into a reverse mortgage, now is the time to consider moving forward.

Though it will likely take years to assess the true impact of this week’s announcement, this much is apparent now: if a homeowner just barely qualifies under current guidelines, he or she may be ineligible under the new guidelines. Future applicants with little or no mortgage debt will see notably smaller lines-of-credit than they would have under current guidelines. It also means thousands of homeowners will be scrambling to get a place in line for their mandatory FHA reverse mortgage counseling.

NOTE: Loans already established, and those with FHA case numbers dated on or before October 2, 2017, will not be impacted by the changes announced.

History will be the judge as to whether these changes were wise. But one thing is certain: if intentions are to “some day” look into a reverse mortgage, that day has arrived.

If you would like to gather more details, give me a call. I always love hearing from you.

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How is a Reverse Mortgage different from an Equity Line of Credit?

Laurie MacNaughton 2017

Answer? In several important ways…

Brought to You By…George Clooney

Laurie MacNaughton [506562] © 2017

I was proud of myself: I got through the whole appointment without saying what was on my mind, namely, “Holy cow – you look just like George Clooney.”

But I also didn’t say the other, more pertinent thing on my mind, which was, “Your parents are in their mid-90’s and you’re only now starting to talk with them about powers of attorneys? How can this not have come up until now?”

I get it – it’s a weird task with loads of emotional baggage in tow. Even after my parents were both diagnosed with cancer I had a hard time broaching the topic.

But on the other hand, speaking as one who frequently deals with issues related to not having documents prepared in advance, let me say this: please, PLEASE, if you’re the adult child of aging parents, ask your parents if they’ve prepared their documents and have kept them up-to-date. If they have not, encourage them to do so in terms as strong as you can muster.

As a reverse mortgage specialist here’s a scenario I see far too often:

Last year mom began showing signs of dementia, but dad was coping with her care. Now, however, mom has completely lost it, dad has medical issues of his own, and he’s no longer able to meet mom’s needs. Finances are under strain, mom and dad need in-home care, and eventually may need to apply for Medicaid.

But dad cannot sign documents for mom. And you, as the adult child, cannot sign for either mom or dad.

Why not? Because they never drew up their Powers of Attorney appointing an agent to act on their behalf. If dad can still make executive decisions, he has the opportunity to draw up a Power of Attorney. But mom? It’s too late.

Here’s why: once someone is mentally incapacitated, the Power of Attorney option is off the table because powers are granted to an agent by an individual who has the mental capacity to do so. This means once mom has lost her mental faculties she can no longer grant you, or anyone else, the power to make decisions for her. So now the court needs to step in and appoint a Conservator and/or Guardian (these are two different roles, though the same person can be appointed for both). In very broad terms, a Conservator deals with fiduciary matters and a Guardian handles legal and medical affairs.

The court gets involved because once a Guardian or Conservator has been appointed for mom, she loses many rights and responsibilities – a decision the state does not take lightly.

The process of becoming Conservator and/or Guardian typically takes a couple months – though emergency guardianships are possible – and can cost several thousand dollars. A little bit of pre-planning can avert substantial cost and non-inconsequential hassle.

As life expectancy continues to rise, many of us will deal with the needs of aging parents. If no planning has been done, in a moment’s time we can find ourselves dealing with an emergency but no legal authority to make decisions.

So please, talk with your parents. Now. Before there is an emergency and no easy solution.

And, if you have questions about reverse mortgage give me a call. I always love hearing from you.

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Or…you can just strike oil

Laurie MacNaughton [506562] © 2017

When I was little I played house. I played school. I played orphan, pilgrim, mommy, fairy, and – as we called it then – Indian. In another nod to the political incorrectness of the time, my sister and I once played Siamese twins by tying ourselves together using my father’s neckties. Notice…”once.”

But never among the roles my siblings and I played did we include “adult child of an aging parent.” I didn’t see this role in the families I knew nor did I read about it in the books I read. In fact, the role wasn’t really much of a “thing” back then – and by “back then” I mean the 1970’s.

Fast forward: today most of us are either dealing with aging-related issues as they impact ones we love, or we have friends who are. And, typically, chief among the issues is the financial cost of care.

This Saturday past I met with an impressive couple in their lovely home. Both retired medical doctors, they did everything right – saved, lived within their means, engaged in a healthy lifestyle. But now, though only in their late-seventies, they’re beginning to worry their retirement savings may not be sufficient.

So what’s the deal here? How could a solidly upper-middleclass couple have made a significant dent in their savings ahead of schedule?

Easy: they’re bankrolling the wife’s 96-year-old mother. And in this case, though Mom is advanced-elderly, she’s by no means at death’s door. From all appearances, she could live another five years, maybe more. She’s not going back to work, however, and she long ago exhausted her own retirement savings. That means her daughter and son-in-law are probably looking at several more years of providing for Mom – and Mom’s care costs are unlikely to decrease over time.

Scarcely does a week go by that I don’t see some variation on this same theme: a couple who indeed planned appropriately for retirement, but was thrown a curve ball in the form of financing a relative’s longevity. Good health insurance is not a cure, as insurance doesn’t pay for many goods and services attendant with aging, and family typically foots the bill for non-medical sundries.

We hear a lot about a sustainable drawdown of retirement savings. But the not-uncommon situation I’m describing is a double drawdown, meaning the retired couple is funding their own retirement and a parent’s longevity. If the couple also goes on to enjoy a long life, they are likely to need someone to step in to help finance them. You can see a multigenerational impact in the making.

I hasten to add I was privileged to assist in the care of my parents, both of whom died of cancer a few years back. However, I am still in the workforce, and consequently did not experience a drawdown of my retirement funds, let alone a double drawdown. At least not on the surface.

Look a little closer, however, and there was a very real long-term financial cost: every dollar I spent flying to Arizona to spend weekends with my parents was a dollar I was not putting into retirement savings – and transit costs barely scratched the surface of my expenditures. Don’t get me wrong: I wouldn’t have traded those months with my parents for all the 401(k)’s in the world. But the point remains: the financial reality of caring for aging parents carries a long-range impact.

So what’s the cure here? Well, one is what J. Paul Getty said, namely, “Rise early, work hard, strike oil.” Sign me up.

For the rest of us, there are several things financial professionals recommend, including  becoming a lifelong saver – meaning continuing to save even once you’re receiving Social Security or other retirement benefits. Increasingly I hear financial advisors say they’re incorporating aging-parent care-costs into discussions even with younger clients.

But here’s also where a discussion of reverse mortgage comes in. Along with many others, when I first heard the term I assumed reverse mortgages were some shady mess cooked up in the back alley – and there’s a historical reason most of us think that. However, the modern reverse mortgage is an FHA-insured home equity line of credit designed to give homeowners access to some of their home’s equity, while not creating a monthly repayment obligation.

Reverse mortgage is going to play a role in the long-term financial well-being of many boomers as they age. Furthermore, if boomers’ parents are homeowners themselves, the parents’ reverse mortgage can help fund their care, taking some of the financial burden off adult children. Indeed, over the years I have done several “twin” reverse mortgages – one for the adult children and one for the advanced-elderly parent.

With longevity increasing, none of us is likely to get by on just our Social Security. Few will survive just on an IRA, a 401(k), or pension – or, for that matter, on a reverse mortgage. But when added together, all these contribute to becoming “self-pay” through the end of life.

A reverse mortgage is not a fit for everyone – no one financial product is.

But a reverse mortgage is going to play an important role in many homeowners’ financial health in retirement, particularly when used as part of a sound, long-term retirement plan.

Or…you can just strike oil.

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Silence of the “Silent Generation” extends to finances

Laurie MacNaughton © 2017

Yesterday I met with two couples, one in their 60’s and another in their early 80’s. The younger couple was discussing a reverse mortgage as part of their pre-retirement financial planning. The older couple, retired for years, has encountered serious health issues and is drawing down retirement funds at an unsustainable rate. They’ve also been late on their past few mortgage payments, which is likely to complicate their reverse mortgage qualification process.

Couples in their 60’s, couples in their 80’s – this is a pattern so common I had to reflect for perhaps the hundredth time: where are the couples in their 70’s, members of the so-called “Silent Generation”?

I can only conclude the following: 60 may well be the new 40 – but 80 is still 80. However, when you’re in your 70’s and still in the workforce, long past the age at which your parents retired, it can be hard to fathom that within a decade your finances may be stressed and your health may be less than stellar. A strong work-ethic and an uncomplaining acceptance of circumstances served the Silent Generation well…right up until it didn’t.

And here’s the real rub: if the couple I met who now are in their early 80’s had sought financial help five years ago, odds are they would not be in the straights they’re now in.

A reverse mortgage can help in several ways with financial survivability in retirement: it can pay off financing currently on the property. It can establish a line-of-credit safety net that grows over time. Or, reverse mortgage proceeds can be structured as a monthly stipend that arrives each month for as long as at least one homeowner resides in the home.

Reverse mortgages are not a fit for everyone – no one financial product is. But a reverse mortgage is going to play an important role in many homeowners’ financial health in retirement, particularly when used as part of a sound, informed, long-term retirement plan.

If you would like to explore how an FHA-insured reverse mortgage might help with your retirement plans or with the plans of those you love, give me a call. I always love hearing from you.

Laurie

 

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And…It’s Good News!

Laurie MacNaughton © 2016

So, first the technical mumbo-jumbo (and it’s good news): FHA just announced the Reverse Mortgage loan limit will go up to $636,150, effective January 1, 2017.

Why You Care

Starting January 1, homeowners aged 62 or older who have higher-value homes (i.e. homes that appraise for $636,150 or more) will have access to more equity – potentially meaning a bigger line of credit or a larger monthly stipend.

Reverse for Purchase

For those looking to purchase a home using Reverse for Purchase, this new lending limit means homebuyers may be able to consider extra aging-in-place amenities or other upgrades.

Rates Are Low, Housing Values Are Strong

If you are considering a Reverse Mortgage, now is a really great time to move forward, as you may qualify for more than ever before. So give me a call – I always love hearing from you!

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