EPISODE #739 The most effective product messaging for reverse mortgages
[Reverse Mortgage Daily] In RMD’s most recent podcast Chris Clow interviews one originator who’s found what he sees as the most effective approach to reverse mortgage communication.
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Protect Your Retirement Income from Inflation
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EPISODE #735 “The reverse mortgage business is teetering on collapse because…”
[Reverse Mortgage Daily] sat down with Ted Tozer who served as president of Ginnie Mae to get his perspectives and outlook for the Home Equity Conversion Mortgage (HECM) program.
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How to be a retirement lifeguard (and recruit others)
There are millions of older Americans swimming in the pool of retirement. The question is who’s looking after those retirees showing signs of distress or in danger of drowning financially? The best lifeguards are proactive looking for the slightest hint of any problem that could become a life-threatening situation. It takes a sharp-eyed financial advisor to catch a problem before it becomes a crisis, especially when you have hundreds of clients swimming. Some are in the deep end taking the biggest risks, some are in the shallows and prefer to play it safe, while others are quite comfortable regardless lounging along the sides.
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Let’s be honest. None of us have the wherewithal to protect every retiree in our city, much less those who live on our block. First, you don’t have the time, and second, you don’t have direct access to that pool of retirees because you’re not privy to their financial status. You’re a reverse mortgage professional; not a financial advisor or accountant.
What we’re talking about is not some new scheme that will somehow boost our personal or collective loan volume to new heights. We’re talking about becoming a relevant part of the retirement conversation and helping real people with real needs that may determine the quality of their life, health, and relationships.
One of those needs is being prompted by the big squeeze, otherwise known as inflation. A mere 10% increase in the cost of living can reduce a portfolio’s longevity for retirees drawing fixed-income investments or savings. That’s a 50% reduction or half as many years that their money will last. Any competent financial advisor knows this and will make excess withdrawals due to inflation a key part of their annual review with clients.
As a financial lifeguard, it’s never fun to tell someone that they’re drowning but they just don’t know it. Yet that’s exactly what many advisors will face in that difficult conversation. Will they tell them they need to reduce their expenses or standard of living? Perhaps, but who really wants that? Will their advisor suggest that they increase their investment returns by taking more risks? Not likely if they have a conscience and any common sense. Will they tell them to go back to work part-time or find ways to generate more monthly income? Perhaps, when it makes sense and their client’s health allows for a return to work.
The more likely strategy financial professional may suggest are to increase allocations of energy, materials, and financial stocks while reducing exposure to retail and consumer service sectors. But even if that works will that strategy generate enough earnings to offset inflation. Likely not. That generally leaves one choice, assets. The question is whether to sell an asset outright or slowly dissipate the accumulated equity. To suggest a retiree sell their home, downsize or rent and invest the proceeds is a bitter pill to swallow. After all, who wants to get rid of the home they worked so hard and diligently to pay down or pay off completely? The home where they feel safe and surrounded by memories.
The more palatable solution advisors can present is an asset dissipation plan. One that avoids selling stocks when their share prices are down as a realized loss. A solution that takes some of the winnings off the table while finding more financial assets to extend or preserve sustainable withdrawals. A typical asset dissipation strategy, often called asset depletion, takes a fixed withdrawal from an account to boost income. But what happens when that asset’s value has been drained? It’s gone. However, a reverse mortgage provides the ability to tap into the value of an asset that typically appreciates and outperforms the market without relinquishing ownership or encumbering other assets as security. Now that’s one strategy that could substantially boost any financial professional’s skillset as a retirement lifeguard. Not only could they prevent their client from drowning, but they could actually give them the means to swim with confidence, or even relax along the sides knowing the lead weight of inflation won’t sink them after all.
Equity-rich homeowners find themselves squeezed between inflation and a volatile stock market
We should never forget that today’s economy isn’t just a hardship for retirees, for many it’s an outright nightmare. Older Americans are seeing their purchasing power evaporate as they ratchet up retirement withdrawals in the effort to stay afloat. Older renters who don’t have a nest egg of home equity built up are feeling the worst effects of inflation.
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The Pensacola, Florida station WEAR-TV reports one 64-year-old retiree, Ruby Gilbert, is going back to work and is looking for a job after the rent on her Lantana, Florida apartment was increased from $1,450 per month to nearly $2,000.
Inflation has another insidious side-effect; reduced retirement savings. Many pre-retirees have reduced or halted their automatic retirement savings investments finding life is getting just too expensive to save for tomorrow. The impacts of depressed savings will be felt in the next five to ten years.
All is not lost, however. In fact, one group of retirees may unwittingly be sitting on top of a potential solution to their inflation-driven cash flow woes. Homeowners. Some of the same policies that led to a surge in domestic inflation also inflated home values. And that’s good news for seniors on a fixed income who feel the brunt of inflation with housing, food, energy, and gasoline accounting for 75% of a typical senior’s budget. The challenge is the growth in home values that may help older homeowners has also damaged the overall housing market.
The run-up in home values has become so absurd homebuyers are finally deciding to stand on the sidelines.That’s not surprising considering the recent surge in 30-year fixed-rate mortgage rates coupled with peak home prices has made homeownership unaffordable for millions. Once again the housing market would have been relatively undamaged by a sudden rise in home mortgage rates if home appreciation grew at typical rates of 3%-4% a year. However, the Fed’s policies stoked another irrational white-hot housing market.
That leaves retirees facing uncertainty. For example, the S&P 500 index closed down 18% year to date while Moody’s Analytics data suggests the average home value is inflated by 24% with values outpacing income growth. In such circumstances, older homeowners are being squeezed on all sides with a declining retirement portfolio, inflation, and hundreds of thousands of dollars in equity that could begin to erode this year. Right now it’s too early to tell if we’ll have a housing market crash or a correction but mark my words, we will have one or the other. Housing prices cannot remain at these inflated values without the support of underlying economic fundamentals. Home sales have fallen four months in a row while the number of new home listings is surging across several key U.S. metros. And there’s a dirty little secret hiding in plain sight. The U.S. Census Bureau reports that 13.4 million Americans are either currently in default on their home payments for a mortgage or rent. Nearly 5 million of these households will be foreclosed on or evicted in the next two to three months. While these displacements are genuinely tragic they will substantially increase housing inventory putting pressure on home prices and rental rates.
Ironically loan delinquency rates are down 1.93% month-to-month and 42% less than they were one year ago according to Black Knight data. If the U.S. enters a recession, which seems a likely outcome, expect to see foreclosure start and filings surge. All things considered, older homeowners with considerable equity stand best-prepared to cope with the increasing cost of living. The question is are they aware of their options?
