Are You Overestimating Your Ability to Access Your Own Money in Retirement?

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Over the last couple of years, Ive spent a whole lot of my time talking to people in or approaching retirement, and Im here to tell you that when it comes to looking at retirement, we are in general an overly optimistic bunch. Im not saying we should be pessimistic about our futures either. Im just suggesting a little honest reality check is in order.

What I learned interviewing homeowners in or approaching retirement age, is that on some topics we are way too confident on others, were in denial and there are many issues that too many people have simply never even considered.

For example, Ive found that most homeowners are dramatically overestimating their ability to pay off mortgages and/or access the equity in their homes once retired. I think the reason for such overconfidence is that our past experiences are telling us that we can do something that were going to find out the hard way, we no longer can.

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Problem #1: Accessing home equity is nothing like it used to be.

It was only a few years ago that if you had equity in your home and you wanted to convert some of it into cash, you could get approved for a Home Equity Line of Credit (HELOC) or second mortgage, in a few days and without fail but those days are long gone.

In case youre not already aware, getting approved for a HELOC today is nothing like you remember it.

Today, there are new ability to repay rules that impose strict income requirements on approval for these and virtually all other loans. That means that even if you have a high FICO score and plenty of equity in your home, that wont be enough to get you approved. Today, in order to qualify, youll also need to show that your income is sufficient to repay the loan and all of your other expenses.

The amount of equity you have doesnt matter when were talking about qualifying under the new ability to repay rules.

Today, its all about your monthly income and if youve stopped working, monthly income is probably the one thing youre not likely to have in large supply. And remember how you used to be able to get a HELOC and then use the cash you got from the loan to make the monthly payments? Well, you wont get a loan on that basis anymore either.

Not that taking out a HELOC is a great idea during your retirement years anyway. Its really a terrible type of loan for older homeowners because although it allows for interest only payments for ten years, after that the loan becomes fully amortizing, meaning the monthly payments can increase quite a bit after that first decade of interest only payments has ended.

If you took out such a loan such when you were 65 and still working, youd be 75 when the payments jumped up, and if by then youve stopped working and youre income has gone down as a result, those higher payments can cause real problems.

Today were witnessing the impact of HELOC payments increasing ten years after their origination, and more and more homeowners are finding their way into foreclosure as they are unable to make the higher monthly payments nor are they able to refinance under the new rules.

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Problem #2: You cant retire with a mortgage.

Traditional mortgages were never designed for people in their retirement years.

The idea has always been by the time you turned 65, you had already paid off your mortgage. However, the refinance boom that ended in 2008, left millions of older homeowners with mortgages, which is a state of affairs that never existed in past years.

A recent report from Harvard Universitys Joint Center for Housing Studies showed that as of 2010, 40 percent of households 65 and up were still paying a mortgage. Contrast that with data from 1992, when only 18 percent of homeowners over age 65 were still making monthly mortgage payments.

Without a monthly mortgage payment, the idea has always been that you could get by on Social Security, a pension and whatever savings you had accumulated during your working years.

The problem today is that 10-12 million older homeowners still have mortgages, with many having refinanced only a few years ago while at the same time far fewer retirees have pensions on which to rely and most people havent been able to save nearly enough to support their lifestyles through what may turn out to be decades of retirement.

Consider that during the 1930s, when Social Security was established, people started receiving benefits at age 65, and the life expectancy of the average male was about 67.

Today, the average 65 year-old males life expectancy is roughly 80 and the average 65 year-old female lives a bit longer than that. The average 80 year-old male today can expect to live until hes close to 90, and the average 90 year-old can expect to make it until almost 95.

Never before have we faced the prospect of having to support ourselves for 20-30 years of retirement without running out of money before we reach our life expectancies. And although at 55, I wouldnt claim to know everything about retirement, one thing Im sure of is that running out of money at 80 and living until youre 90 or beyond would suck.

Im not even sure that its possible to save enough during ones working years to make it for 20-30 years without income at least not based on stock market returns.

Last week, salon.com published an article titled: 401(k)s are a sham. Its about the many inadequacies of 401(k) plans, when trying to accumulate enough wealth to maintain ones lifestyle once retired. The article concluded that

The United States is on the verge of a retirement crisis. For the first time in living memory, it seems likely that living standards for those over the age of 65 will begin to decline as compared to those who came before them

Do the math and youll quickly come to realize that as long as youre still making a mortgage payment, you cant really retire. I mean, its hard enough to make it for 10, 20 or 30 years without a paycheck from work even if you dont have a mortgage payment to make each month but with a mortgage payment, for most people, its pretty much impossible.

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Most peoples solution: Ill just work until I drop dead.I cant even count the number of people who have told me that their plan for retirement is to just keep working until they drop dead. The problem is that although its a cute phrase and maybe a comforting thought too often, life simply doesnt work that way.

Last May I wrote an article about this fact of life, titled: Counting on Working Past 65 is Statistically Being Overconfident, and it showed that based on a recent study conducted by the Employee Benefit Research Institute and others, 50 percent of Americans who plan on working past 65 find themselves retiring unexpectedly.

The reasons given for retirement coming earlier than planned included health problems in 60 percent of cases 22 percent said they had to stop working to care for a family member 27 percent attributed their unexpected retirement to changes at their companies and 10 percent said that new skills required on the job was the cause of their having to stop working sooner than theyd planned for or hoped.

Obviously, if youre forced to stop working sooner than you expected and while youre still obligated to make a monthly mortgage payment, the combined impact on your financial situation can fall somewhere between problematic and catastrophic.

In the best case scenario, youll be forced to start spending down your nest egg to make the mortgage payments each month, but that can mean running out of money well before reaching your life expectancy. Or, you could be forced to sell your home when thats the last thing you wanted to do or theres door number three, I suppose, behind which is foreclosure.

Retirement is harder for women than men

I think its also important to point out that the danger of running out of money during retirement is far greater for women than men. In part thats because on average women live longer than men, so they need their income to last longer and wives often see their incomes cut in half as a result of a husbands unexpected passing.

Another factor is that women in the workforce earn less than men on average, and in most cases women spent fewer years in the workforce as a result of taking care of children, so they receive less from Social Security than their male counterparts.

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Enter the HECM reverse mortgage The only practical way to access your home equity once retired is by using a Home Equity Conversion Mortgage, or HECM for short, which is the reverse mortgage thats regulated by the U.S. Department of Housing and Urban Development (HUD) and insured by the FHA.

The problem is that Ive found the HECM reverse mortgage to be poorly understood by almost everyone.

So, lets start by understanding that a HECM reverse mortgage is just an FHA mortgage that offers the option of not making payments until the borrower(s) die or the home is sold.

With a HECM you can make interest only payments or you can make payments of principal and interest or you can make no payments at all. You could decide to make no payments for five years and then make a payment of $50,000, for example, its entirely up to you.

Having a HECM reverse mortgage is just like having any other mortgage. You own your home you pay your property taxes, insurance and normal maintenance and you leave the home to your heirs just as you would with any other type of mortgage.

Qualifying for the HECM To qualify for a HECM you must be 62 years of age or older and have enough equity in your home to make the numbers work, but in addition, as of this past April, there are new financial assessment rules that apply to qualifying.

I spent a good part of my summer following six homeowners through the process of qualifying for a HECM reverse mortgage, so I can tell you that its MUCH harder today than it was prior to the new rules taking effect last April.

The problem no one talks about

The new rules require that homeowners pass a new financial assessment test in order to determine whether they have sufficient income to pay their debts and living expenses, along with their property taxes, insurance and normal maintenance. It sounds reasonable enough on the surface, but for a number of reasons the new rules definitely can make it significantly harder to qualify for the HECM reverse mortgage.

Ever since the new financial assessment rules took effect, the industry has been bending over backwards to send the message that everything is going to be just fine and dandy under the new rules but since Ive now watched a half dozen homeowners go through the process of getting a reverse mortgage I can tell you that its not the case.

Im not saying that the new rules make it impossible for everyone to qualify, because thats not true either but what is true is that for many homeowners, the new rules mean that if you wait until you really need a reverse mortgage, you may not be able to get one.

Im not trying to be an alarmist or say that everyone should rush out and get HECM reverse mortgages, but what I am saying is that everyone should come to understand how the HECM works and how it could apply to their individual circumstances. If it proves to be something that would help in some significant way, then knowing now is better than finding out later when you may not qualify for any number of reasons.

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Here are examples of what can cause you not to qualify

1. New Income Requirements The new financial assessment rules mean that you have to have enough monthly income to pay all of your bills, your property taxes, insurance and normal maintenance and still have enough left over for normal living expenses. So, if your income were to drop unexpectedly, it might mean that you no longer qualify for the HECM reverse mortgage.

And the fact is, your income can drop at anytime for any number of reasons during retirement. Ive seen husbands die unexpectedly and leave their wives trying to get by on half the income they had before his death. Ive seen people have heart attacks or strokes out of nowhere and have to stop working way before they planned to stop. Ive seen couples divorce, which always costs more than anyone thought, and Ive seen people laid off from jobs they never thought theyd lose.

2. Home Values & Interest Rates Go Up and Down One thing we should have all learned from the meltdown that hit our economy in 2008, is that home values can go up and they can go down. Well, Ive seen several cases where based on a homes appraised value today the homeowner qualified for the HECM, but if that value were to drop by even 10 percent, or interest rates were to rise by a single point, they would no longer be able to take advantage of the HECM.

This factor alone should be a wake up call for homeowners over 62 everywhere. Right now interest rates are still quite low. Low rates mean that homeowners have more borrowing power than they will when rates rise. In addition, although weve seen home prices rise over the last couple of years, many economists are predicting home prices to pull back over the next 2-3 years.

I cant help but worry about the countless homeowners over 62 today who havent taken the time to understand why they might switch their existing mortgage over to a HECM, and who will find themselves unable to take advantage of the HECM in coming years because of higher interest rates, lower home values, or some combination of the two.

3. Realities of Retirement The reality of retirement is that at some point, its likely that your income will drop. According to a recent Employee Benefit Research Institute study: 50 percent of Americans who plan on working longer find themselves retiring unexpectedly. The reasons for such unplanned retirements from work include health problems, changes at work, and having to care for a family member.

4. Unplanned Medical Expenses As someone once said, no one gets notified in advance that: Your heart attack will be next Tuesday at noon. And thats the way it is with medical bills and health care costs in general they show up without warning. One study I read recently showed that people spend just under $400,000 on medical care during the last five years of their lives.

Large unexpected bills that dramatically harmyour financial stabilitycan cause you to fail the HECM financial assessment and make it impossible for you to qualify. However, lets say you had opened a $300,000 HECM Line of Credit at age 62. That line of credit is guaranteed to increase every year by whatever the interest rate is each year, regardless of the homes market value.

So, if the interest rate were to stay at 5 percent, that $300,000 line of credit in 20 years would be worth roughly $800,000 when youre 82. Thats a very nice financial cushion should you need to pay for in-home care in order to remain in your home or to pay for assisted living or skilled nursing care for that matter.

I have to tell you that to my way of thinking, waiting to set up a HECM Line of Credit makes no sense whatsoever. If you never need to access the funds thats just great, but if you do find yourself facing exorbitant medical expenses later in life, youll be thrilled that you have a source for the cash you need that doesnt have to be repaid until after your death from the sale or refinance of your home.

5. Credit Card Debt Lets say that youre forced to use your credit cards to pay some unexpected expenses and then you want to use the HECM to pay them off. Well, that may not work because today you cant use a mortgage to pay off debts unless they are liens on your property. So, to qualify for the HECM, youd have to have enough income to support the minimum payments on your credit cards, even though your plan is to use the proceeds from the HECM to pay off those debts.

6. Late Payments If you find yourself struggling to make ends meet during retirement, whether because your income drops or your expenses rise, it could cause you to fall behind on one thing or another. If that happens, it could prevent you from being able to utilize the HECM.

The HECM reverse mortgage is not a credit driven product, which means theres no minimum credit score needed to qualify. However, if youve missed a few payments over the last two years, whether for property taxes or credit cards, you could find out that as a result, you cant use the HECM after all. Its not an absolute rule or anything like that, but it definitely can happen.

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Here are the top three examples of what most people dont realize about retirement

A. Essentially, no one in this country is financially prepared for retirement today. Thats right, I said essentially no one. Sure, there are a relative handful of really rich people running around in $100,000 cars and living in homes that look like large hotels from a distance, but lets leave them out of the discussion, okay? They dont matter.

If your currently living on annual income of $100,000 a year or more, then youll need something like 75 percent of that amount to maintain your lifestyle during your retirement years. If youre going to live on Social Security and withdrawals from a retirement plan account, youll need between $1.5 and $2 million saved when you retire and Im going with really low estimates so as not to freak everyone out.

Since Ive read recently that the average 65 year-old couple has about $100,000 in their retirement plan account, its easy to see that we have a very serious situation ahead for tens of millions of baby boomers as they leave the workforce and enter their retirement years.

B. Retirement today meansdecades, not years. Imagine trying to live your life for 20-30 years without getting a paycheck from work? I dont know about you, but it sounds impossible to me.

Think about how long 20-30 years really is. How can you hope to predict what will happen to you over that many years? Imagine its 1980 and youre trying to predict what will happen to you by 2010 without a paycheck from work the entire time, and trying to survive on a government check for $1500 a month. Think about that. Its horrifying.

Its lifes cruel joke that although were living better than past generations and were living longer than ever before that also means that if were not extremely careful, our last ten years are increasingly likely to be spent living closer to the poverty line than we ever did during our working years.

C. We over estimate the value our savings and underestimate how much well need to maintain our lifestyles once weve stopped getting a paycheck from work. We assume that well need less money each month to live on when were older, but studies show this isnt a well-founded assumption.

Think about it and youll realize that most of our living expenses dont change just because we stop working, and some like health care costs are all but certain to increase significantly as we get older.

Now, lets say youre 65 and have $500,000 in your 401(k) or IRA. That sounds like a fair amount, until you stop to realize a few things. For one, it might have to last 30 years. For another, withdrawals are taxable as ordinary income, so if taxes go up in the future, and I cant find anyone who doesnt think they will, then your accumulated savings will provide less than you thought.

And for yet another, we should all know by now that stock markets go up and stock markets go down (and I never seem to get in before they go up nor do I ever get out before they go down.) If you have $500,000 in your 401(k), and the market drops by 20 percent, as it has quite recently, as a matter of fact then your $500,000 just turned into $400,000.

Now, if you dont need to use that money, maybe you can avoid taking withdrawals until the market comes back, assuming it does but if you need to use that pool of money for living expenses, then once the market drops, youre simply stuck living on less than youd planned.

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What to do, what to doThere are more than enough so-called experts writing about what to do to ensure your financially secure retirement, but if I had to sum up what they all say, Id say that their advice falls into three categories

Save more.Make sure youre diversified properly.Invest with them.To those that tell me to save more, I can only say thank you Mr. Retirement Expert.

People whose advice is to save more clearly dont understand whats going on in real life. Its not that we dont try to save more, but between the bubbles bursting and the rocketing costs of health care, college tuition, cars and more it often feels like Im using a Dixie Cup to bail water out of a row boat while others are drilling larger and larger holes in its bottom.

As to where to invest? Dont even get me started. If anyone can answer that question correctly then theres a pretty good chance he or she is going to end up in jail for insider trading.

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So, heres one thing you can do If you still have a mortgage, you could stop making your mortgage payment by switching to a HECM reverse mortgage. That way, you wont have to make monthly mortgage payments and hopefully can save that money each month.

If youre payment was $2,000 a month, then youll be putting away $24,000 a year and over a decade, you could have a nest egg of close to $500,000 as a result of saving your mortgage payment instead of making the payment to your bank.

On the other hand, if you keep paying your traditional mortgage, and you refinanced in the last decade, then mostly what youll have done in ten years is paid a lot of interest to your bank. By switching your mortgage to a HECM in your sixties, you could get yourself 10 years or more to save for retirement by eliminating the need to make a monthly mortgage payment.

And dont be so optimistic about your ability to pay off a mortgage once in your sixties or seventies and beyond. If youre 65 and have a mortgage with 20 years to go, its unlikely that youll ever pay off that mortgage, assuming you dont win the lottery or receive another windfall.

I know that for many people, 65 is still young enough to keep working, but 75 may be another story altogether and few among us are able to continue working into our 80s.

Remember, when you have a HECM reverse mortgage you can keep making payments, if thats what you want to do, but should something cause you to stop working unexpectedly, at least you wont have to worry about being forced to sell your home or in the worst case scenario, losing it to foreclosure.

If youve already paid off your mortgage, consider opening a HECM Line of Credit now before you need it meaning while you can still qualify for it. A HECM Line of Credit cannot be cancelled so its guaranteed to be there for the rest of your life and it goes up each year by whatever the interest rate is for that year.

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Lastly, if youre thinking about downsizing into a less expensive home, which is always a good idea, by the way. You may not be able to increase your income in your 70s, but if you can reduce your monthly expenses, its sort of the same thing.

So, go ahead and sell your home, but dont pay cash for the next one. Instead use a HECM for Purchase to buy your retirement home and that way youll be able to hold onto more of your cash and wont have to make monthly payments on the mortgage unless you want to.

For example, using a HECM for Purchase, my Reverse Mortgage Intelligence Teamrecently helped a woman buy a $600,000 home with only $260,000 down, instead of paying cash. Now she has $340,000 in her bank account that would have been buried in her new home had she paid cash for the preperty she never has to make a mortgage payment and assuming she pays her property taxes and insurance, she can live in that home without paying a single mortgage payment for the rest of her life.

Is the HECM for Purchase a better way to finance a home during retirement than any other theres no question in my mind that the only answer is a resounding YES. In fact, its not only better its MUCH, MUCH better.

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Times have changed, and our views need to change with the times

Change #1: Today, the money you put into your home by making mortgage payments is essentially buried in your back yard and chances are, once youve retired, the only way to get that money out is to sell the home.

Change #2: Today, retirement is measured in decades, not years. At 65, you could be looking at having to maintain your lifestyle for 20-30 years, much of that time without getting a paycheck from work. Thats not going to be easy for anyone for many it will prove impossible.

Its a fact: The HECM reverse mortgage, depending on how its used, could be the difference between living comfortably throughout ones retirement years and scraping by, stressing out, and trying to survive for the last decade or longer of your life.

Ive devoted the last eight years of my life to writing about the financial and foreclosure crisis because I wanted to help people understand what was happening and because I wanted to help people avoid losing their homes to foreclosure.

Now Im on a mission to make sure everyone I talk to comes to understand how the HECM reverse mortgage, if intelligently applied to their individual circumstances, can be the most effectivetool in todays retirement toolbox. Im not saying you shouldnt save more or diversify your portfolio by all means do whatever you can to improve your position related to retiring.

But whatever you do, dont let uninformed negative soundbites keep you from learning about how the HECM reverse mortgage, the HECM for Purchase, or the HECM Line of Credit can help you achieve your retirement objectives, and definitely dont wait until disaster strikes, because the new rules could put the HECM out of reach when you need it most.

Mandelman out.

###My Reverse Mortgage Intelligence Team wants to help make you smarter about how to use the HECM, HECM for Purchase &HECM Line of CreditIts been two years in the making, but my Reverse Mortgage Intelligence Team at Shore Capital is finally open for business and ready to help homeowners in ways others in the industry have never even considered. And as of today, we can help people in five states including California, Ohio, Florida, Washington and Colorado with Arizona right around the corner.

Our team isnt just a bunch of loan officers, rather its made up of highly experienced professionals, including a CPA, estate planning and pension plan attorneys, financial and mortgage industry experts all dedicated to making sure that homeowners are able to make intelligent decisions based on accurate information and clear comparisons of alternatives.

We dont sell reverse mortgages, we employ them to solve problems when doing so represents the optimal answer. We take the time to thoroughly understand everything about each homeowners individual situation before putting our team of experts to work examining and then illustrating how the HECM family of products can be used to increase your future financial security.

We know everything there is to know about how the HECM, HECM for Purchase and HECM Line of Credit work, because not only have we worked with senior underwriters to originate all of them in real life situations, but before we went to work offering to help others, we spent two years studying the products and exploring how they could be applied in any number of situations. And because of our access to senior management at many of the top lenders in the country, we routinely accomplish things that others simply could not.

You need to learn more about my Reverse Mortgage Intelligence Team and you can do so by emailing me at mandelman@mac.com. Were looking for exceptional people to work with and perhaps join our team, so if that sounds like you lets talk soon.

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