Previously I had written about the sequence of returns and how investment results in the future can be dramatically different, especially if you are simply using a single “average” rate of return. In retirement we also expect to take distributions from our investment accounts to provide income. How to structure these withdrawals is a subject for future articles. What I want to do here is help us understand the need for flexibility in the unfortunate circumstance where the sequence of returns is unfavorable.

To illustrate this I put together the following table using returns for the S&P 500 for the past 15 years. To make this example meaningful, I've also set up a distribution from the account at a rate of 6% per year. Though I've set the starting value at $100,000, the example is illustrative regardless of the amount.






​

















​The table uses S&P 500 returns for the last 15 years going forward on the left side, then uses these same returns, only in reverse order on the right side of the table. Let's take a look at the approximate midpoint of this timeframe (see highlighted numbers). The person experiencing the returns on the left side (years going forward) is probably suffering some anxiety. In contrast, the person that experiences the returns on the right side is probably euphoric. At the end of the 15 year period both have seen some ups and downs. But the person on the right side is clearly feeling quite safe as their balance is greater than their starting point. Not so for the person on the left.

We don't have control over the returns from the market, but there are a number of things we can control. The two most important areas that we can control is our spending in years where we encounter significant downturns, and equally important how we tactically adjust our investments to minimize the effects of significant downturns. When we approach retirement we need to establish guidelines on spending that give us some confidence that we can maintain a sustainable life style over a reasonable projection of our lives. With those guidelines in place we will be better prepared to make the tactical adjustments needed throughout various market cycles.

Previously I wrote about reverse mortgages in order to make you aware of this option. In many conversations it is apparent that a lot people have little knowledge, and often misunderstanding, about this topic. Reverse Mortgages can be a very useful strategy for many people during retirement. Despite its bad reputation, it's now well regulated (by the feds) and a legitimate source of income. Especially if you are house rich and have modest investment assets.

One of the common questions I'm asked is: How can (should) a reverse mortgage be set up to provide income? While there are many options for reverse mortgages, in this article I want to outline one particular strategy, referred to as a “tenure” payment. When we hear “tenure”, we naturally think of things like a tenured professor, or someone's term in a particular position. In the case of reverse mortgages, a tenure payment program refers to the term of payments to the homeowner for the life of the owner, while they live in the home. Tenure payments are generally structured as monthly payments to the owner. This may sound a bit like an annuity (a payment for life). It's close, but not exactly the same. One difference is that tenure payments are received only while you are living in the home. Commonly, annuity payments continues as long as you live, regardless of where you live. In the case of a reverse mortgage, if you leave your home the loan will typically need to be repaid at that time. Recall that the lender has provided this loan based on the fact the home is your primary residence.

There's another difference. Many annuities stop payments when you die. Regardless of how much money you paid for the annuity, the payments stop and the insurance company keeps the rest of your money. A tenure payment program will stop as well if you die. But, the amount of the loan also stops. Which means your home, when sold, has only to pay off the loan amount plus any accrued interest and your heirs keep the rest of the sale proceeds.

Finally, there is a difference in how a reverse mortgage and an annuity are funded. To fund an annuity, we transfer money to an insurance company to buy the annuity. That's money we have ready at our disposal, such as from savings or IRA accounts. In the case of a reverse mortgage, we don't give anyone money directly. Rather, we sign a contract with a bank or some other lending institution for a specific amount of money to be provided to us, with our home as the collateral. The bank will receive payment for the loan once the house is sold or no longer occupied by the owner. The loan accrues interest just like any other loan. But, unlike most other loans, the amount due on the loan can never exceed the sale value of the house. They term this a “non-recourse” loan. The bank has no other recourse if the funds from the sale do not satisfy the loan.

Why do I draw your attention to the tenure payment program? Because there are those that have directed their income towards a highly valued home, but in doing so may have contributed less to savings or retirement accounts. Having invested so much in their home, they want very much to live there for a significant time in retirement. With less money saved in conventional accounts, the tenure payment program is an excellent option to turn their home equity into a needed income stream during retirement.

I want to re-emphasize a couple of important points for reverse mortgages. You continue to own your home. The reverse mortgage merely serves as a loan that is paid off when the home is either sold or upon death of the homeowner. You decide how long to stay in your home or when to sell it. The bank can never call the loan and demand you move. If you relocate or die, the bank’s sole recourse for the amount loaned to you is repayment of the loan from the sale of the house proceeds. Most commonly, the value of the property exceeds the amount due on the loan. Therefore, you or your heirs retain the rest of the proceeds from the sale.

There's likely a lot of questions you have in regard to this idea. I'll be glad to talk with you to see if this makes sense for you. Just call or email me.

When asked, most people will automatically state that they want to live longer. Who wouldn't? Yet many people are anxious when considering this question. A recent study on this found that 70% of the people asked were concerned about what that meant for them financially. By the way, these were people that ranged from boomers to gen x'rs.

The interesting thing was how many people stopped to think about what they would differently when considering a much longer life. Over half the gen x'rs thought they should look at non-traditional career paths. For example, take breaks from work for volunteering or return to school to pursue a different calling.

This is where the respondents also stopped to think about how much they spend and how much they save. As many of us know, its hard to fund a 30 year retirement after only working 40 years. It's challenging for many young people to appreciate the need to begin saving for retirement when they're twenty something. They can usually see five, maybe ten years ahead. The idea of locking away their money for retirement 40 to 50 years in the future is a distant and abstract time.

It turns out there is a compelling method to bring these young people on board with retirement saving. It's simply to direct attention to the idea that their peers are doing it. It's amazing how influential your peers are. This is a very human characteristic and one in which we are all governed to a large degree.

Many companies today offer 401k plans with default sign-ups. While this is good, the defaults are not going to cut it in the long run. Instead, the message to the young worker should instead advocate a much higher than default percent. The message can simply state that most of our workers think contributing 15% (or some other plausible goal) is needed. With this nudge, more young people will get on board with their peers. Left to themselves though, the default is going to seem good enough.