LATE START STRATEGY: Creating retirement income to last a lifetime… even if you haven’t saved a nickel.
You read things all the time about how few people have saved enough to maintain their lifestyles during their retirement years. Some say it’s in the 50 percent range that have essentially no savings while only years away from supposed retirement. Needless to say, many if not most continue to work through their 60s and into their 70s… and I don’t think there’s any question that the numbers in this group will continue to grow steadily, maybe for the next 16 years or so.
I can’t recall the stats exactly, but I don’t think it matters… the point is unchanged: A huge percentage of baby boomers are woefully unprepared financially for retirement. And the rest are lying about it.
By the way, is it even possible to be financially prepared for thirty years of living without getting a paycheck from work?
Think about the last 30 years. The crash of the late 80’s, the recession of ’91-’92, the dot-com bubble implosion, and of course this last financial calamity of Herculean proportion… what would you have to have to protect yourself through that kind of financial bedlam over decades in time? I don’t think, as a practical matter, it’s even possible.
So, here most of us sit… on the precipice of a crisis that will see many of our elderly unable to support themselves throughout their expected lifetimes. It will not be pretty.
The answer is simple: INCOME. You need some. The more the merrier, but no need to get carried away. You probably don’t need that much income to make the whole retirement thing work for the most part, that is. Extraordinary events may lead to extraordinary measures being needed… your actual results may vary… and past performance is no assurance of future success.
The Case of the Couple in their 60s with No Savings…
The couple in question is a real couple, they called me last year in response to an article I’d written saying that everyone should have or at least carefully consider a reverse mortgage. Their names have been changed, but the facts are the same. They are in their mid- to late-sixties. Both are still working full time… one spouse actually has two jobs. They were wiped out in the last financial tsunami, after being almost wiped out during the one before that… and the one before that.
For a while they fell behind on their mortgage payments and almost lost the house, but they managed to save it.
They’ve spent through all of their savings, and are starting from scratch as far as retirement savings are concerned, but without the years needed to make the most out of compounding interest. Some would no doubt say that to continue working is the only reasonable path.
I say, there’s never only one path from which to choose.
The couple’s only asset was a home, worth a little over $700,000. They had read an article I’d written about reverse mortgages but even though they desperately needed to supplement their retirement income, they were frightened by them as a result of reading what’s so prevalent in the press… inaccurate crapola, misinformation and media hyperbole.
I explained that it’s only a mortgage, and asked, were they afraid of their last mortgage? This one is even less scary than the last, if mortgages themselves can be thought of as scary.
They explained that the home was all they had left… they thought a reverse mortgage would put it in jeopardy… somehow… because of the interest compounding… and pounding… and pounding… until you’ve got nothing left. The government designed it to take people’s homes by giving them hundreds of thousands of dollars first… it’s positively brilliant.
I explained that reverse mortgages are not robotic equity eaters. In fact, just make interest-only payments periodically, if it’s the interest that bothers you… problem solved. I also explained that in that house, they have an asset that could be turned into a source of renewable income that could keep them comfortable throughout their retirement years, and they’re not using it.
Sometimes all you have is all you need.
So, they asked, what happens when we sell the house? Say we net $625,000 after sales commissions, etc.
Find a new place to live… and in this case we want a four-plex, which we found listed at $650,000. We’ll fix up one unit just the way we would want it. Rent out the other three for $700 a month each.
And we’ll use a HECM-for-Purchase reverse mortgage to buy it, which means we put about $300,000 down and the HECM picks up the rest. We have no mandatory mortgage payments for the rest of our lives, or as long as we live there.
We dodn’t have to worry about our credit being bad because qualifying for the HECM is easy… no credit score or income requirement… all we need is to be at least 62 years of age.
It’s a big change going from a large house to an apartment in a four-plex, but remember we’ve got $325,000 in the bank at this point so we can make it whatever we want, within reason… might even be able to add a second story, if that’s what we wanted to do, but for sure we can make it primo… put in a pool.
In this case we put about $75,000 into our remodel, so we’ve got $250,000 in the bank when it’s all said and done. But we’ve also got a couple grand a month in income. Add it to our Social Security income and we’re now bringing in over $4,000 a month. (She’s still going to work part-time because she likes her job and he’s picking up extra income helping people with their taxes, as he’s a retired CPA.)
All together, they now have retirement income of over $7500 a month… and $4250 of that even if neither works at all.
Oh, and they have no mortgage payment, remember. In fact, they still have almost 50 percent equity in their property.
“It felt almost like, like… winning the lottery.”
That’s what he said about the whole thing. “We went from feeling total desperation and dread to feeling like we were living again… looking forward to our future. We went from insecure to secure during the two hours we spent on the phone with you. I really don’t know why everyone doesn’t know about the HECM program, but they definitely should. I sure tell everyone I meet.”
From zero to financial security for a lifetime in under two hours, and it only took that long because I had to look stuff up on HUD’s website. Not bad considering they’re 69 and 66 years of age, respectively, and didn’t have a dime in the bank going in.
I love reverse mortgages. They’re like working with Play-Doh, you can shape them to capitalize on a myriad of opportunities, and solve a huge range of problems. It’s tragic that everyone doesn’t get it yet… but they will, rest assured of that. Nothing this good stays misunderstood in the shadows forever or even for long.
BUT THEY’RE EXPENSIVE?
Okay, who just thought that? I heard you think that. Come on… raise your hand if you just thought that or wanted to say that. I can see you…
Well, sit back down, genius… you’re being ridiculous.
Now, let’s take this slowly so no one gets lost. I need to respond to this preposterous assertion that reverse mortgages are somehow “expensive” three ways… present two arguments… two perspectives.
- They’re not expensive.
That’s right, simple as that. The origination fees are capped at $6,000, and the FHA insurance is just… well, FHA insurance. The FHA has been around insuring loans for Americans since 1938, I believe, and no one complained about it before. In fact, it’s actually a major American success story.
That insurance means you’ll never owe more than the home is worth, no matter what. Do you know how many millions of American homeowners would have killed for that provision to apply to their mortgages this last go around?
And besides all that, they’re just not “expensive.” I’ve gotten a few mortgages in my life and I don’t find them expensive, in fact, I’ve been charged more for loans at times that I can recall, so stop making it sound like someone’s buying a Ferrari when they get a reverse mortgage, okay?
- Want to compare the cost of reverse mortgages to alternatives? Fine, let’s rock.
First of all, how much are reverse mortgages compared with the cost of the other mortgage that I don’t have to repay?
HELOCs aren’t an alternative, by the way. For one thing, you won’t qualify because when you need one, you’re income will have dropped… which is why you need one, of course… but you won’t qualify. It doesn’t matter how much equity you have, today’s lending standards are income and credit score based, and they’re tighter than whatever is always really tight.
And not only that, but HELOCs are interest only payments for 10 years and then they adjust and become fully amortizing, meaning that your payments jumps up by hundreds of dollars a month. The problem is that after 65, your income has the tendency to drop over the next 10 or 20 years. So, your income drops over 10 years, but the payment on the HELOC goes up in 10 years.
It’s just a bad idea… I don’t care if it’s “on sale” price-wise. It’s certainly no “alternative” for a reverse mortgage… and if you want to say it is, then it’s a terrible one.
Other alternatives to reverse mortgages includes things like protecting your home from foreclosure should the mortgage payment become unmanageable for whatever reason. So, that’s kind of an expensive alternative to a reverse mortgage, isn’t it?
Foreclosure still costs more than a reverse mortgage, doesn’t it? I mean, when you factor in the movers and all those boxes you have to buy at the UPS Store or wherever… oh, and the tape, there’s also all that tape. Don’t want to forget the tape costs in that important calculation.
- WHO CARES WHAT THE COSTS ARE? YOU AREN’T GOING TO PAY THEM.
Let’s be real here… it’s not like you’re going to have to get your checkbook out and write a check for any of this stuff… these “costs.”
Let’s say you had the reverse mortgage for ten years. You figure your house will appreciate by at least two or three percent a year, so in ten years it will have gone up from say $300,000 to roughly $400,000… but wait, you have to deduct the costs plus any interest that’s accrued to those costs over time.
How much could it possibly be? Interest on $6,000 in origination costs over 10 years isn’t even worth calculating… it’s just not that much. Let’s be silly and say it went up to $20,000… somehow, it more than tripled.
So, now instead of your home having appreciated by $100,000… it only went up by $80,000. If it cost $50,000, then your home only went up by $50,000. Who cares? Yeah, you’re paying the costs… sort of. You’re sure not writing a check.
Meanwhile, those “costs” have also gotten you maybe $300,000 to use to improve your life during your retirement… to create income, to protect your investments, to provide you with peace of mind. There are probably an unlimited number of reasons people could use reverse mortgages to make their situations better.
It’s just a mortgage, people. A mortgage that offers the most flexible repayment terms imaginable. You can make interest only payments, you can make fully amortized payments, or you can make no payments. It’s up to you.
And frankly, everyone should have a reverse mortgage line of credit, at the very least, assuming they have sufficient equity, of course.
Answer this for me… if HELOCs were just fine, everybody had one or wanted one… then why aren’t HECM lines of credit just fine with everyone too? I mean, they’re basically the same thing, although the HECM line of credit is even better than the HELOC in so many ways… still, how come the HELOC is fine and dandy, but the HECM has some sort of stigma attached to it?
Maybe it’s from the distant past, and I don’t know, nor do I care about any of that. I’m only interested in what the HECM reverse mortgage can do for people today… and tomorrow. And in that regard, it can do a whole lot… more than any other financial product I can think of by a long shot.
They’re just awesome, and please do stay tuned because this was just the first “LATE START” retirement strategy I’m going to be publishing on Mandelman Matters. There’s lots more to come in the days, weeks and months ahead.