I Don't Need a Reverse Mortgage
You tell me you don't need a Reverse Mortgage because:
- I don't have a mortgage
- My income is equal to or greater than my expenses
- My retirement portfolio is sufficient for both our lifetimes.
- I might consider one later when I'm older, home values are up and I think I need it.
For something you may not know about a Reverse Mortgage, please look first at my article $1,000,000 and then come back here.
The future looks pretty good for you. Your best guess is you will live out your life/lives in your home without having to borrow money or consider a Reverse Mortgage. But we all know 'things happen'.
First, have your plans accounted for the following:
Portfolio Might Run Out
Something I hear frequently from those considered house rich and cash poor (currently one seen as a typical Reverse Mortgage client.) lived longer than planned. They say that if they knew they were going to live so long, they would have done things different.
But your Financial Planner (FP) has worked that out by taking a certain amount from your portfolio combined with your pension and Social Security will last you well into your 80's or 90's (what is the age he quoted?) But if you live past that age...?
But what if one of those 'things' happen - see below.
Death of Spouse
I hope you've considered this as part of your planning. Certainly, you know you keep the higher Social Security check but lose the other one. How does that affect the plan your FP put together for you? Did you both have pretty big checks (with more two earner families now, that is quite likely).
Let's talk about that pension again. Did you do the right thing and protect your spouse against loss of income on your death? (Thank heavens my dad did that for my mom. When he died, she continued to get his full pension and just had the loss of her much smaller Social Security check.) Unfortunately, I've talked to too many people where the spouse (usually the husband) took the single life annuity. This provides for income only during the lifetime of the individual. Too many times a surviving spouse is left without that pension payment and the lower Social Security check is eliminated. A double whammy.
The choice my dad made was a joint and survivor annuity. There are different versions. One like my dad's - called the 100% option - the payout was a modest percentage less than he could have had but the amount was not reduced or eliminated on his death. The others are 75% or 50%. The 50% provides a check closer to the single life annuity but it drops to 50% of its value on the death of the annuitant.
Pension goes down or disappears
If you have a pension, you are one of the lucky ones. Guaranteed for life with inflation adjustments.
Have you retired yet? If not, what happens if you get fired before you are eligible for a pension? If you read the AARP newsletters, you will see many cases of that happening. They've filed age discrimination suits and sometimes win but usually not. Age discrimination is too hard to prove. As 'bad' companies see their pension obligation grow beyond a manageable number, they may resort to this approach. But, how much pressure does it take for a 'good' company to turn 'bad'?
Or maybe your company will declare bankruptcy and try to come out of it by dumping their pension obligation or just plain go out of business. Consider the problems many airlines have/had. United Airlines (I worked for them for 17 years), among others, declared bankruptcy. When a company goes out of business or legally can change its pension requirements, an organization called the Pension Benefit Guaranty Corporation (PBGC) will become involved. Companies with defined benefit plans pay into the insurance fund. If they fail, the PBGC will be responsible. But there is a maximum amount they will pay - $4,943.18/month - $59k annually (as of this writing). So what if you were an airline pilot or other highly paid employee expecting a much higher pension. What about your Health and Welfare benefits? Sorry. What if too many companies default at the same time? This is just an insurance fund and the PBGC could run out of money. You might want to take a look at the website and learn more about this. Many, many, many companies are underfunded now.
Long Term Care (LTC)
You probably have auto and home insurance. The American Association for Long-Term Care Insurance (AALTCI) (we'll consider them biased for the time being because they are trying to sell something) quotes that for those over the age of 65, the odds of having a major house fire are under 3% and for a severe auto accident of 18% or less. Is it correct that you have auto and home insurance? But becoming disabled to the point of needing assistance is about 70% for women and over 40% for men. Have you signed up and been accepted for long term care?
If you have LTC, what does it cost you? The AALTCI estimates for those age 60 the costs will range between $2,700 and $5,600 per year for a couple. What do you expect that will add up to over your life time? If used, how much will it pay out and over what period of time? Their estimate is based on $150/day for a 3 year period with inflation coverage. That totals $164,000 paid out by the insurance company. How does that compare with the chart on the $1,000,000 page?
What if your LTC company raises rates. Or you just can't keep up with their fees. What is Plan 'B'.
Or, maybe you haven't got around to it yet. Or you did try but couldn't qualify. Now what? How do you handle the 40-70% odds of needing LTC in your lifetime?
Remodeling the home for aging
Probably not too big a deal. Install some hand holds in the bathrooms and a ramp to the front door. Maybe the bedrooms are upstairs and you decide to convert some space or add a bedroom downstairs. Still, maybe not too costly but does subtract something from your portfolio you might not have counted on and perhaps sooner than you even thought possible so you would also lose the potential growth of those funds.
You may have back up plans.
I have an Equity Line of Credit for emergencies
That is good thinking and can work for short term needs and for some limited amount of time. Most banks don't charge much, if anything, in up front fees. Interest only payments (which may be going away) can be relatively small with low balances. Although, if you have to keep borrowing from it due to more 'emergencies', that payment will keep going up. Rising interest rates may also force that payment up.
But, what a lot of people don't realize is that an equity line of credit has a limited 'draw' lifetime. Most banks have a limit of 10 or 12 years. At the end of that period, if you qualify, you may be able to 'refinance' it with a new equity line with a new draw period. Keep in mind, though, that you might have originally qualified when you were earning good money and your situation may have changed since then. Or maybe it was during the period when the banks were 'easy'. If you were breathing you probably qualified for $100,000. So, if you don't qualify for a renewal, most banks have provisions to change the interest only choice to a fixed rate amortizing loan with no draws allowed. At today's rates, that roughly doubles the monthly payment. If you have no balance, that isn't much of an issue. But if you do have a balance, maybe a big balance, is your home at risk?
Take another look at the growth of the Reverse Mortgage Line of Credit with no monthly payments. If you chose that 10 years ago (or when you turned age 62) instead of the Equity Line, how much might be available to you now without the risk of the loan coming due, rescinded by the bank or having the limit reduced?
Still working and not going to retire
You really like what you are doing, maybe it isn't physical labor and you see no reason to retire. In my industry (Reverse Mortgage) many of my colleagues are over 70 with a few in their 80's. I'm 66. You are enjoying yourself, travel some with the extra money but certainly aren't building up a multi-million dollar portfolio.
Maybe you will be lucky, like Bing Crosby dropping dead on a golf course doing exactly what he wanted, and die in the middle of a key stroke. But life might not work that way.
I'll get more money from a Reverse Mortgage when I'm older and the home is worth more.
This is a common statement I don't hear but people think it. I should bring it up because there are a lot of misconceptions with this.
Yes, you get more money, all things being equal, as your age increases. But (using the numbers from $1,000,000) waiting a year would provide a benefit of about $2,000 more and waiting 10 years would provide about $15,000 more. But consider that Line of Credit (LOC)growth if he didn't wait. One year later, it would have grown about $10k and ten years later by about $100k.
So, let's assume that ten years later the house is worth $400k instead of $300k. Now we have about $70k more than if we hadn't waited. But, remember, the LOC went up about $100k from when we got it 10 years ago.
And, remember, I said all things being equal. Let's say you wait 10 years (ten years older and home worth $100k more) but interest rates went up, I think I'm being super conservative here, 1% (one percent). Instead of $70k more than in the example above, we only received $40k more. But, the LOC might have increased $100k, maybe more with higher interest rates.
And some more quirks in the system we can't count on.
- Three times in the past 7 years, Congress and/or HUD have reduced how much you received, all things being equal. In 2009 by 10%, in 2010 by 10% and in 2013 by 15% (although in 2014 they reversed some of that for older borrowers but not all).
- During the economic crisis, congress lifted the home value limit from $417,000 to $625,500 on a temporary basis. Each year since then, Congress has extended it another year. While we thought some day this might be rescinded, so far we have dodged that bullet. In fact, for 2017, they increased the limit to $636,150. The possibility they might lower the limit now seems less, you just never know what will happen in the future.
- In the past year, there was some discussion in Congress of eliminating the program altogether.
The elephant in the room. Will it help your portfolio grow more than higher prices hurt it? I remember when I started in the work force; I thought if I could make $10,000/year I'd be in clover. I did that in 1973 and passed my dad's salary (as an engineer for PG&E) in 1974. I found a little online calculator and today you'd need to earn about $55,000 dollars to equal the $10,000 in 1973. The median US household - not individual - income in 2011 according to the US Census Bureau is about $50,000. So how much will you need to be drawing down from your portfolio 10, 20, or 30 years from now? Or, heaven forbid, you live past age 100.
Or something else - who knows what?
As I said, I am 66 and thought I was in a fairly decent position but I hadn't considered all the above until I started writing this article. Had you?