Reverse Mortgage A Rite of Passage for Retirement?

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Younger Reverse Mortgage Borrowers

Why Reverse Mortgages May Be the New Norm in the Future

Will Reverse Mortgages become the norm? According to one retirement expert getting a reverse mortgage may become more common amongst future retirees. The shift to younger borrowers may be a result of more Americans reaching retirement only to wake up to the reality that their home is an essential and useful source of funds. Watch this week’s video for more.

8 comments

James E. Veale, CPA, MBT August 20, 2012 at 9:42 am

“It doesn’t bother me…. If borrowers are taking a reverse mortgage younger in order to postpone drawing upon Social Security or to pay off their existing mortgage, both seem like legitimate goals.”

The quotation is an excellent example why the Boston College Center for Retirement Research has less than a stellar reputation for its research. Here Ms. Munnell is simply opining about the legitimacy of the goals not their economic validity. This kind of irresponsible statement only further clouds the reputation of this “research” center which supplies opinions without doing the required research.

Using proceeds to pay off an existing mortgage is much different than using it to postpone drawing upon Social Security. The risks are entirely different.

By paying off the mortgage, not only is one debt simply exchanged for another but more importantly from a cash flow standpoint, the senior is saving actual cash flow based on the after tax cost of the interest which the senior would otherwise be required to pay which living in the home. Later some or all of that cash flow could pay down the reverse mortgage but with an adjustable rate HECM, all of that same cash would be available for subsequent withdrawal, meaning the availability of the cash would never be lost to the senior as long as the HECM is still outstanding. It is this availability of cash through the monthly growth in the principal limit which makes HECMs so valuable in cash management.

The HECM proceeds used to delay Social Security benefits are not insured or recoverable unless the beneficiary lives long enough to recover the benefits lost from the amounts they receive in excess of what they would otherwise receive in such benefits. So if a senior passes away before then, the value of their estate is less not only by the difference between the proceeds spent versus the excess in Social Security benefits received but also by the accrued costs on the HECM. If the seniors need those funds for something different, they have nowhere to go to recover them.

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Jim Warns August 22, 2012 at 10:59 am

Arguing against using the proceeds from a reverse mortgage to defer taking Social Security by lamenting a smaller estate in the event of an early death misses the point. One would have a larger estate if one did not purchase homeowner’s insurance and pay the associated premium, assuming one’s house did not burn down. The deferral of SS in the interest of gaining a larger monthly benefit for life is the equivalent of purchasing ‘cash flow insurance’ in case one, in fact, lives. Dying early is the equivalent of one’s house NOT burning down – not a good reason NOT to buy the ‘insurance.’

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James E. Veale, CPA, MBT August 23, 2012 at 12:59 pm

Jim,

Would a typical estate be larger IF homeowners insurance is not paid since almost all Americans buy their homes using mortgages which REQUIRE that insurance? Unlike buying a home, there is no requirement in obtaining Social Security benefits that one defers them!!!

Yet you are perfectly right to use that argument since it shows the kind of logic used by most of those who promote the deferred strategy in a completely unethical and incompetent manner.

As to the estate issue, you have it all wrong. This is not just an estate issue, it is ALSO a cash management issue.

By taking cash now out of the reverse mortgage to defer Social Security benefits, you are guaranteeing a smaller cash reservoir in the intervening years in the hopes that after 15-20 years of first first receiving benefits the cash will be returned and over all cash flow will increase thereafter. Do you understand cash management risk???

Do you really care about the prospect or are you just trying to originate a HECM? I have openly asked when is it appropriate to use the deferred strategy using HECM proceeds because I believe it can be!!! The problem is when I ask advocates like you to provide just one example, you guys come up with illogical refutes like the one you presented.

Where is your example of showing how risk was reduced or at least offset AND it will be a benefit to the Social Security beneficiary and the estate of that person? I have some but people like you are selling an idea potentially far worse than deferred annuities to seniors; yet I also argue that deferred annuities for seniors in many cases do make a lot of sense in the RIGHT circumstances!!

Here is my example of why I view advocates like you as unethical. You claim the strategy is sound without any caveat. OK, would you recommend it to a senior who is in fourth stage irreversible cancer is currently 62, has no spouse nor expects to be married before their pending demise and yet has an adult child? Until you can show me why such a person should use your strategy, your idea makes us all look unethical!!!!

Or how about the couple who are “more affluent” and are using the reverse mortgage as a reserve reverse mortgage (as recommended by Dr. Salter) and are risk adverse? Why would they even want to consider your strategy???

Your response is as illogical as those who advise all eligible seniors to get reverse mortgages. Reverse mortgages are a great financial product but they are not right for all.

I am just thankful you did not use your ACTUAL FULL name!!!! I can clearly show where this is a sound strategy BUT I do it with caveats. Where are yours????

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Jim Warns August 24, 2012 at 5:25 am

James –

My post dealt only with the single, isolated ‘argument’ that the HECM SS deferral strategy should be avoided on the grounds that it will potentially reduce the size of a borrower’s estate. I stand by what I wrote.

You apparently read my post as a blanket endorsement of the HECM SS deferral strategy for every borrower, which is incorrect. A full treatment of the subject would require far more space and time than even that which you gave it in your well-reasoned response.

That said, I find your personal attacks to be inappropriate and offensive and suggest that you try temper your remarks in the future.

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James E. Veale, CPA, MBT August 24, 2012 at 1:07 pm

Jim,

Please reread your original comment and explain how it is not a blanket endorsement of the Social Security deferral strategy. You equate the strategy to the need of homeowners to buy homeowners insurance.

All competent financial advisors recommend every homeowner who has improvements of any significant value which serve as their primary residence should be insured as long as the homeowners policy can be obtained at a reasonable price which all but a very small number of homeowners can. I would advise the cancer patient in my last comment to pay his homeowners insurance even though I would STRONGLY advise against deferring his Social Security benefits by using reverse mortgage proceeds.

It is my argument that not every eligible senior should use the Social Security deferral strategy. Using your ridiculous insurance example which you declare you stand by, the cancer patient should use the Social Security delay strategy by using reverse mortgage proceeds to replace the Social Security benefits. Again your homeowners insurance argument is one of the key but worthless rationales used by those who preach blanket endorsement.

If you stand by your comment, actually stand by it. You want us to believe that you understand the issues but you fail to address the terrible comparison you make of the deferred strategy to the need for homeowners insurance. If you stand up for your first comment in this thread as written, understand there is no way you can convince me that you do not make the same blanket endorsement for the Social Security delay strategy that I make for homeowners insurance.

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James E. Veale, CPA, MBT August 26, 2012 at 9:46 am

Jim,

It seemed the best way to address your made up argument about the following was through a new and separate comment: “My post dealt only with the single, isolated ‘argument’ that the HECM SS deferral strategy should be avoided on the grounds that it will potentially reduce the size of a borrower’s estate. I stand by what I wrote.” That quotation is an argument in a vacuum.

Did you read the first comment above or did you simply skim it? My comment addressed an unspecified number of risks when stating the following: “Using proceeds to pay off an existing mortgage is much different than using it to postpone drawing upon Social Security. The risks are entirely different.”

The final paragraph of the first comment above deals with two of those risks: the first is the estate of the Social Security beneficiary and the second (the last sentence of that last paragraph) is quoted here: “If the seniors need those funds for something different, they have nowhere to go to recover them.”

So let us step into your vacuum and debate the estate issue. It is nonsense for a senior not to consider their estate; however, that should NOT be their sole criteria BUT neither should it be ignored. It is one of many issues to look at.

Seniors are scared of running out of money. I see far too many in almost all fields of business preying on those fears rather than sitting down with retirees and actually discussing their financial situation as a whole rather than piecemeal.

Please address why the estate should not be considered when the strategy is nothing more than LEVERAGING in most cases far more than $100,000 into a risk strategy that exceeds the risk of investing in deferred annuities being offered on the market today.

Have you looked at the cash payback period or the overall economic payback period? Did you analyze the income tax impact on concentrating Social Security benefits into a shorter period?

So let me ask you. What is the best strategy for a couple? Should each spouse defer their benefits through reverse mortgage proceeds and if not, please disclose how YOU make those determinations? Far too many advocates in our industry look at this issue as if the best answer can be discovered in a vacuum and leveraging the estate is a reasonable answer when they rarely have a grasp of the actual risks.

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Jim Warns August 27, 2012 at 4:57 am

If nothing else, this exchange is an interesting commentary on the potential for misunderstanding that exists in asynchronous communication.

I chose homeowner’s insurance arbitrarily as an example of an insurable risk; you apparently read my choice of example, being nearly universal, as therefore being a universal endorsement of the SS deferral strategy. Not the case, and if my choice of analogy leads others to that same conclusion, then I stand corrected….on the choice of analogy.

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James E. Veale, CPA, MBT August 27, 2012 at 9:58 am

Jim Warns,

Your last comment shows how little you understand the risks of the strategy you advocate. Who cares why you chose homeowners insurance, it is a ridiculous comparison but it is the one you selected.

You seem satisfied that as long as the strategy could potentially yield $100,000 more in net benefits than it costs, it is a good bet. BUT if it takes $150,000 which is outstanding for 8 years and the payback period on the investment is 15 more years BEYOND that without considering accrued costs, are you really happy with that result when all or some part of that $150,000 is at risk during that 23 year period? In the field of financial planning we call that a very high risk tolerance. Like most people gambling with OPM (other people’s money) you seem to have a high risk tolerance when no matter what the outcome you make money.

Your idea of what makes financial sense and a good bet are much different than mine.

But let us get past single Social Security beneficiaries (for now) where it is very simple to discredit your position and move to where the gold is for most seniors with this strategy, married couples.

BUT with married couples the issues are much, much different and can be far more complex. Is what is good for the goose necessarily good for the gander? Unless you actually have a handle on the issues, you could be advising seniors to be throwing money into a fire with no hope of recovering those dollars.

Based on what you have stated to date, I really doubt if you have a strong grasp on the issues. Worse, I read nothing about your advice to seniors to seek the strategy recommendations of those who are experts on the deferral strategy. (The Social Security Administration will discuss the options but their employees are forbidden to even suggest what might be the best choice as to benefit alternatives,)

To date your explanations are more about overcoming objections than understanding the issues and making reasoned recommendations based on that understanding. If you are not willing to discuss the real issues, that is OK but expect me to treat your suggestions as nothing more than unethical.

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