March 2016
Kiplinger Newsletter
It’s very gratifying to know that such an esteemed financial resource has published an article that supports the wisdom of using funds from a Reverse loan for retirement planning.
And it’s not just the Kiplinger Newsletter touting the benefits gained from using the FHA HECM loan for retirement options.
More publications such as the Huffington Post, the Wall Street Journal, the Financial Advisor Magazine and others are taking very serious considerations about their use to extend retirement funds.
Here is a copy of a summary of the Kiplinger article that was published a couple of weeks ago. I’m a bit behind on the Reverse loan loan, but here it is.
Kiplinger: Consider Reverse Mortgages in ‘Ramp-Up’ to Retirement
Posted ByJason OlivaOn March 10, 2016
“Reverse mortgages are becoming more synonymous with retirement planning as the mainstream media continues its coverage on how these financial products can help both retirees and pre-retirees.
The latest reportage from Kiplinger’s Personal Finance April 2016 features two stories on reverse mortgages and how they fit into retirement planning discussions.
Earlier this week, RMD guided readers to an article that spotlighted how rule changes over the past few years have enhanced the appeal of reverse mortgages for retirees. As a result of this “makeover,” Kiplinger said reverse mortgages can be a flexible source of retirement income.
In another article published this week, Kiplinger suggested using a reverse mortgage to tap into home equity as one possible “money move” for pre-retirees to ramp-up their retirements.
The article included several tips such as maxing out retirement accounts, creating a retirement budget, adequately preparing for long-term care, plotting a Social Security strategy and, last but not least, tapping into home equity.
Depending on a retiree’s situation or personal preference, Kiplinger suggests downsizing into a lower-cost home to cut housing costs in retirement. For those who would prefer to remain in their current home, a reverse mortgage might be the better solution.
“You may conclude that staying put is a better idea,” writes Jane Bennett Clark for Kiplinger’s Personal Finance, April 2016. “In that case, look into a reverse mortgage.”
“These deals, available to homeowners age 62 or older, give you access to home equity,” Clark adds. “The loan does not have to be repaid until the last surviving borrower dies, sells the house or moves out for at least 12 months.”’
Reverse Loan Tenure Option
At last, I am posting the final section of an article that was recently published in the Journal of Personal Finance. It was very long and I could not share it in it’s entirety on this site.
So I broke it up into seven parts and this is the last bit of it. Overall, it’s in interesting commentary on comparing using the Tenure payment option from a Reverse loan in lieu of receiving payments from an annuity.
New Research Shows Financial Planning Value of Tenure Reverse Mortgages
Posted By Jason Oliva On March 3, 2016
“Because of the assumption that withdrawals are taken from savings before tapping the line of credit, the line of credit option depletes savings but leaves some home value. Tenure, on the other hand, depletes home value more and leaves remaining savings.
“Overall, the tenure option does somewhat better than the LOC in terms of both consumption and bequest measures,” researchers state. “This reflects tenure not depleting savings and thereby leaving more money invested in stocks, the potentially highest return asset.”
Because the tenure option pays out a higher rate than the SPIA, the study indicates it is necessary to allocate $238,061 for SPIA purchase, compared to the $201,174 borrowing limit used to generate tenure payments.
The SPIA option leaves median consumption about the same, but does reduce consumption risk, according to researchers who note that under the SPIA home value is preserved for late-in-life needs or a bequest.
“If the goal is to maximize consumption without a bequest concern, the reverse mortgage options win out over the SPIA,” the study states. “If bequests are important, the decision requires evaluating tradeoffs between consumption and bequest.”
Reverse Mortgages and Annuities
An interesting article and study was published recently by the trade magazine The Journal of Personal Finance that did a comparison between using a tenure payment option from a Reverse mortgage versus receiving a payment from an SPIA.
Here is part VI of the article that I have gradually been posting in this blog.
New Research Shows Financial Planning Value of Tenure Reverse Mortgages
Posted By Jason Oliva On March 3, 2016
“Researchers then move onto how the reverse mortgage options and SPIAs, either separately or together, can be integrated with systematic withdrawals to improve retirement outcomes.
Per the already established scenario featuring the 65- and 63-year-old husband and wife, researchers also assume this couple—who have a $400,000 home with no mortgage—also has $1 million in tax deferred savings.
Additionally, their Social Security income is $30,000, which will increase each year for inflation, and is assumed to reduce to $200,000 in real dollars when either member of the couple dies. It is also assumed that this couple has their savings allocated 60/40 in stocks/bonds and rebalanced to this allocation annually.
Compared to relying only on systematic withdrawals from investment accounts, the use of either reverse mortgage option (LOC or tenure) was found to greatly increase consumption—$70,881 median consumption for the line of credit, compared to $74,735 for tenure payments and $64,287 for systematic withdrawals.”
SPIA V.S. Tenure Payments from a Reverse Loan
In my previous post I shared a portion of an article that was published recently in the Journal of Personal Finance. It’s quite long, so I have been breaking it up to make it easier to read here on my blog.
The most recent post shared an example of how using a Tenure payment option from a Reverse loan, might be better that that from SPIA.
Here is part V and a comparison to the previous post.
New Research Shows Financial Planning Value of Tenure Reverse Mortgages
Posted By Jason Oliva On March 3, 2016
“By comparison, researchers note that a SPIA purchased with $201,174 would pay $955.21 per month, based on market rates as of August 2015 for SPIAs sold directly.
“The SPIA advantage is that payments continue until both members of the couple are dead, whereas tenure payments only continue until the home is vacated,” the study states. “For couples who can put plans in place to utilize home care if needed and keep their home as long as possible, the tenure option can be expected to provide payments for a duration similar to a SPIA.”
The term tenure payment calculation is based on an interest rate that is the sum of the annual Mortgage Insurance Premium of 1.25% and the HECM Expected Rate, which is the sum of the 10-year LIBOR swap rate—about 2.3% in August 2015—and a Lender’s Margin, which may vary by lender, but was set at 2.5% in the NRMLA calculator as of the date of the research’s publication. The researchers’ example of the 65-year-old husband and 63-year-old wife assumes a 4.8% HECM Expected Rate.
“The tenure payment calculation uses a higher expected duration than the SPIA, which would lower the payout rate, but a higher interest rate, which would raise the payout, and the interest rate more than offsets the duration,” the study states. “So based on current pricing, tenure payments ($1,130.36) will exceed SPIA payments ($955.21) when the SPIA purchase amount is set equal to the HECM Net Principal Limit.”
HECM Money
Recently a report was published in the Journal of Personal Finance that discussed how using the Tenure payment option available in a Reverse mortgage, could possibly benefit seniors who acquire a Reverse loan.
The portion of an article that I am posting today, is part of a larger and longer piece and I have previously created three different posts that share it in smaller pieces for the reader. Here is part !V.
New Research Shows Financial Planning Value of Tenure Reverse Mortgages
Posted By Jason Oliva On March 3, 2016
“With the reverse mortgage options, purchasing a SPIA improves the security of retirement income, but does not increase the income,” the study states. “Combining SPIAs with reverse mortgages provides a way to gain additional retirement income security, but without much impact on the overall level of retirement income.”
Researchers ingrain their analysis around a scenario involving a husband and wife as borrowers, a couple which they believe presents a more typical situation for financial planners. Specifically, researchers assume the couple lives in a $400,000 home and that the husband is 65 and the wife is 63.
Based on August 2015 interest rates, for this couple the initial principal limit they would receive from a Home Equity Conversion Mortgage (HECM) would be $212,000, according to researchers’ calculations based on the reverse mortgage calculator provided by the National Reverse Mortgage Lenders Association.
Under this scenario, a borrowing couple utilizing the reverse mortgage tenure option would be able to obtain $1,130.36 per month. Assuming setup fees were financed ($212,000 – $10,826), the available amount for borrowing would be $201,174.
By comparison, researchers note that a SPIA purchased with $201,174 would pay $955.21 per month, based on market rates as of August 2015 for SPIAs sold directly.”