Using Your Home Equity for Long Term Care

For many seniors the equity in their home is their largest single asset, yet it is unavailable to use unless they use a home equity loan. But a conventional loan really doesn’t free up the equity because the money has to be paid back with interest.

A reverse mortgage is a risk-free way of tapping into home equity without creating monthly payments and without requiring the money to be paid back during a person’s lifetime. Instead of making payments the cash flow is reversed and the senior receives payments from the bank. Thus the title “reverse mortgage”.

Many seniors are finding they can use a reverse mortgage to pay off an existing conventional mortgage, to create money to pay off debt, make home repairs, or for remodeling.

For those seniors who are in need of long term care and want to stay in their home, a reverse mortgage can create the money needed to pay for in-home personal and medical care. They can also pay for needed medical equipment and handicap adaptation to their home.

There are no income, asset or credit requirements. It is the easiest loan to qualify for.

A reverse mortgage is similar to a conventional mortgage. As an example:

 The bank does not own the home but owns a lien on the property just as with any other mortgage
 You continue to hold title to the property as with any other mortgage
 The bank has no recourse to demand payment from any family member if there is not enough equity to cover paying off the loan
 There is no penalty to pay off the mortgage early
 The proceeds from a reverse mortgage are tax-free and can be used for any legal purpose you wish

False Beliefs Regarding Reverse Mortgages

 “The lender could take my house.” The homeowner retains full ownership. The Reverse Mortgage is just like any other mortgage; you own the title and the bank holds a lien. You can pay it off anytime you like.
 “I can be thrown out of my own home.” Homeowners can stay in the home as long as they live, with no payment requirement.
 “I could end up owing more than my house is worth.” The homeowner can never owe more than the value of the home at the time the loan is due.
 “My heirs will be against it.” Experience demonstrates heirs are in favor of Reverse Mortgages.

Virtually anyone can qualify. You must be at least 62, own and live in, as a primary residence, a home [1-4 family residence, condominium, co-op, permanent mobile home, or manufactured home] in order to qualify for a reverse mortgage.

The amount of reverse mortgage benefit for which you may qualify, will depend on

 your age at the time you apply for the loan
 the reverse mortgage program you choose
 the value of your home
 current interest rates
 and for some products, where you live

As a general rule, the older you are and the greater your equity, the larger the reverse mortgage benefit will be (up to certain limits, in some cases). The reverse mortgage must pay off any outstanding liens against your property before you can withdraw additional funds.

The loan is not due and payable until the borrower or borrowers no longer occupy the home as a principal residence (i.e. the borrower sells, moves out permanently or passes away). At that time, the balance of borrowed funds is due and payable, all additional equity in the property belongs to the owners or their beneficiaries.

The most popular reverse mortgages are the so-called HECM loans. HECM loans require that the applicant meet with a government approved counseling agency to be sure the applicant understands the reverse mortgage process.

The Federal Trade Commission states:

“Before applying for a HECM, you must meet with a counselor from an independent government-approved housing counseling agency. Some lenders offering proprietary reverse mortgages also require counseling. The counselor is required to explain the loan’s costs and financial implications, and possible alternatives to a HECM, like government and nonprofit programs or a single-purpose or proprietary reverse mortgage. The counselor also should be able to help you compare the costs of different types of reverse mortgages and tell you how different payment options, fees, and other costs affect the total cost of the loan over time. Most counseling agencies charge around $125 for their services. The fee can be paid from the loan proceeds, but you cannot be turned away if you can’t afford the fee.”

A Reverse Mortgage Specialist in your area can answer your questions, calculate the amount of loan you can receive and advise the type of loan for your needs.

The National Care Planning Council (http://longtermcarelink.net/a7reversemortgage.htm) has a list of Reverse Mortgage Specialists in your area.

Source: Laurie Libby

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TIME TO AVOID STOCKS?

After several market plunges, some investors are saying that they don’t need nor want stocks. They want something safer -

could they do that? Well, they can as long as they have a large enough portfolio that will produce what they require for income without stocks – on today’s interest rates.
That will take a rather large portfolio. Or, if they are able to live comfortably on a very low withdrawal rate – then they can do it, as well.

With a 100% fixed-income portfolio, taking out 3% (adjusted for inflation) would leave you with an 80% chance of the money lasting 30 years. But, could most manage on a withdrawal of only 3% of the portfolio? In many cases, the answer is “no”. Even going from a 3% to a 4% withdrawal rate makes a huge difference over time.

That said, you don’t have to go overboard. Those of you who have been listening for some time know that we recommend a diversified portfolio of approximately 50%-50% between stocks and bonds. Leaning more toward equities may enhance your financial security.

One benefit also is that stocks can help you maintain a higher balance in your portfolio than could a more conservative mix. In the event your spending creeps up, the equities in your portfolio will help you meet those expenses over time.

If folks do not have a pension (and what are those these days?) and little equity in a home that they want to use for retirement income, then they may want to be on the more conservative side of investing.

Like everything else in financial planning, it depends on the individual situation and tolerance for risk.

Source: Linda Barlow, CFP

For more financial articles and tax tips, please visit WISE website at http://www.wise-investors.org

WITHDRAWAL SAFE AT 4%?

The oft-cited “rule of thumb” is that a person can withdraw 4% off their portfolio for retirement income and not run out of money for their lifetime. This would theoretically allow the additional growth to be reinvested and therefore the 4% in the future would keep pace with inflation. This is a good “rule of thumb” with which to abide.

One problem with this, of course, is that the markets fluctuates and one never knows which year it’s going to fluctuate downward. If you retire and the first two years produce negative returns, that 4% that you planned on may be much less than you had previously calculated. Therefore, it’s a good idea to have a liquid nestegg that you can depend on for the first couple of years so you can allow your “serious” money to grow, no matter what the markets do.

The fact is, given all the unertainties in retirement – how your investments will perform, what your actual expenses will be, how long you’ll live – you can’t pick the ideal withdrawal rate in advance. You’ll either deplete your portfolio more than you had intended or you’ll leave behind money that you could have enjoyed.
A much better strategy is to use the 4% figure as a guideline and then adjust as time goes by. Repeat the process of adjusting your withdrawals each year. If a market downturn has depressed the value of your nest egg so much that the probability of your money lasting has significantly declined, forgo an inflation adjustment or trim your withdrawals for that year. When the markets have done well, you may be able to boost your withdrawals and indulge yourself.

The key is to remain flexible.
Source: Linda Barlow, CFP

For more financial articles, please visit Women Investing in Security and Eduaction, WISE webiste at http://www.wise-investors.org.

Saving Taxes

Year-end tax planning is usually stressful, but this year is especially anything but ordinary. Unless Congress acts before December 31, tax rates on wages and investments will rise, the exemption from the estate tax will shrink and dozens of tax breaks will disappear. If that happens, many more Americans will pay higher taxes next year. The average household’s tax bill will increase by about $ 3,500 – and that’s average!

The most likely scenario is that Congress will kick the can down the road again by some sort of extension of the current tax situation. That’s what they did two years ago and now we find ourselves in the exact same situation. No solution – just delay.

If you think your tax bill will rise in the future, you may consider converting some of your IRA money to a ROTH. Of course, that’s assuming that you trust Congress to leave the ROTH rules alone until you need the money – or die.

Also, next year there is scheduled to be a 3.8% surtax on unearned income; this was put into play to help fund the new health care reform law. While withdrawals from your IRA aren’t subject to this surtax, the withdrawals will, of course, boost your AGI, which could trigger AMT tax.

Be sure to contribute the maximum you can to your 401k plan or other retirement plan. That is a good idea under any circumstances.

Gifting makes good sense to shelter taxes from the estate tax. Unless something is changed, the exclusion drops from 5.12 million this year to 1 million next year. Therefore, gifting makes very good sense. Be sure to review your estate plan and see if more gifting, or contributing to a Charitable Trust make sense.

If you believe rates will increase in 2013, then it makes sense to take a different attitude this year and boost income into 2012, rather than defer. Even medicare tax on wages is scheduled to go up in 2013 to pay for the health care law. That additional .9% on wages will affect almost every wage-earner.

Finally, map out your itemized deductions. If the rates increase in 2013, the deductions will be more valuable in the future. One change that is scheduled to happen is the limits on deductions; that will go back into effect in 2013 unless Congress acts. Therefore, taxes will go up for the higher income earners due to the loss of some deductions.

Work carefully through the next few years to try to beat the tax man – it won’t be easy!

Source: Linda Barlow, CFP

For other financial articles or tax tips, please visit http://wise-investors.org/resources.asp

SPENDING PLAN

We’ve all seen those graphs and charts that tell us how much of our hard-earned money we are supposed to be spending in each category of the spending plan. Most of those, however, are very dated and/or don’t apply to our area. Here is a plan that is very current and for Southern California.
The following guidelines are for the typical family of four. See how your expenses compare:
Housing 20%
Taxes 16%
Food 12%
Transportation 10%
Retirement/Investments 10%
Insurances 7%
Utilities 6%
Entertainment 4%
Short-term savings 4%
Other 11%

Short-Term savings is into the savings account and is for things like when the hot water heater goes out, or the annual real estate taxes are due, etc.

The ‘other’ category is for all things that aren’t in the particular other categories. This includes things like clothes, grooming, hobbies, vacations, etc.

Source: Linda Barlow, CFP

For other financial articles or tax tips, please visit Women Investing in Security and Education (WISE) http://wise-investors.org.

TIME TO BUY REAL ESTATE

Becoming a landlord has always been a well-worn path to becoming a millionaire. There is a good reason for this: not only does owning properties let you generate a second source of income, you are building equity at the same time. The reasons for owning real estate are even greater recently with the depressed prices and low interest rates.
There is also a tremendous shortage of rental properties currently. The prices of single-family homes are still rather high, so consider multi-family units. The extra unit or two won’t actually cost you that much more. A duplex or tri-plex doesn’t cost that much more but will provide quite a bit more rental income.
On the financing, some lenders will let you borrow on up to four properties (including your principle residence) with only 20% down. Maybe you can purchase the first property with cash, wait six months, then use the Fannie Mae to borrow out 80%, which you use for down payment on the next property.
There are several paths to building wealth. Real estate is certainly one of them. Don’t ignore this valid investment which belongs among your stocks and bonds.

Source: Linda Barlow, CFP

Women Investing In Security and Education (WISE) wise-investors.org

NATIONAL SAVINGS RATES

We’ve all heard the financial planning “talking heads” say that we need to save more, start younger, and invest more wisely. Easier said than done.
There are so many studies done on this topic. They seem to all reach about the same conclusion, and a recent one is no exception.
It creates savings guidelines for typical individuals with different ages, income levels, and initial accumulated wealth so one can see more easily how to save for retirement.
It uses net pre-retirement income. Not gross, but net. It is assuming that post-retirement income needs to be at least 80% of pre-retirement net spendable income. We think this figure is the minimum – most people definitely do not plan to reduce their standard of living during retirement.
Remember that Social Security is skewed to lower-income individuals. That is, we all know that the lower your lifetime income is, the larger percentage of that is going to be replaced by Social Security. The higher-earners receive a smaller percentage of their pre-retirement income, although they do, of course, receive more actual dollars from Social Security.
There is tremendous encouragement to begin saving no later than age 35. This harks back to the old stand-by that there are essentially two ingredients to building wealth: time and money. The more you have of one the less you need of the other.
Be aware of how much you have saved so far and how much income it can produce through thirty or forty years of retirement. That is the dilemma we find ourselves in recently: the longevity of our retirement years. We have a long time to provide that income stream.

Source: Linda Barlow, CFP

Women Investing In Security and Education (WISE) wise-investors.org