There's a lot to know about reverse mortgages, and accordingly there's a lot of misunderstanding about them. I won't try to explain all there is to know, but I did want to make you aware that there are some very good reasons why you might consider looking into this further.

Let's dispense with a few items that we need to understand. First, you need to be at least 62 years old to qualify for a reverse mortgage. Second, you don't need to own your home free and clear (you might still have a mortgage outstanding). Third, you are not selling your home to anyone. You own it, period. All you're doing is borrowing money from someone. In the future when you do sell your home, the loan will be repaid from the proceeds. (IMPORTANT NOTE: you will never go underwater on the loan. If the proceeds from the sale don't cover the loan, that's tough luck for the lender. There's no recourse).

Why would someone want a reverse mortgage? Here's one short answer; it may be the largest asset you own and you could have a lot of equity (money) sitting there which you need. And, you want to keep living in your home. A reverse mortgage can provide you access to your equity as lump sum, a monthly sum, or as a line of credit to be used whenever.

What's the downside? First, its a mortgage and you will need to pay closing costs. These are normally rolled into the “mortgage” so you don't have out of pocket costs. Second, you will need to pay insurance, in the form of an interest rate, for this loan (just like you would pay a private mortgage insurance fee (PMI) for a regular mortgage with little or no money down. And third, you need to remember that as you spend the money, you're.... spending your money! So its not to be spent frivolously.

Here's what I want to tell you. There are situations where a reverse mortgage can be a huge benefit in your retirement. It can be the reason you have a successful retirement income. I know there's a lot of old information and stories about the abuses of reverse mortgages that you may hear. What's great is that the federal government actually heard them, and has done something about it.

As I said the beginning, there's a lot to know about reverse mortgages. I have a pretty good understanding on these, and who can benefit from them. Feel free to give me a call if you want to discuss this. (ps. I don't sell or provide reverse mortgages. Like everything I write about, it's not to sell you something).

You might have recently read about the jump in LTC insurance premiums for the Federal Government LTC program. The increase, which will take effect in November will average 83%, but could go up as high as 126%. This is not a product that is subsidized by the Government. Federal employees pay the full charge to John Hancock (the LTC insurance provider). The price increase adjusts for changing trends in morbidity (how sick we are) and mortality (how long we live) rates, as well as expected return on investments. Want to know one of the effects of extremely low interest rates? Insurance companies rely on interest rate earnings to meet future claims. The unprecedented low rates are killing insurance companies.

These price increases are alarming for retirees. This isn't a one time expense. These are premiums that must be paid every year you are alive. Furthermore, this doesn't mean that LTC premiums can't go up in the future.

What do you do? Here's the the first thing you do. You conduct a comprehensive analysis of your retirement income, assets, and expenses, and evaluate the impact of long term care expenses in a variety of scenarios. Every person should have one goal, to be reasonably prepared to address a long term care situation without running out of money. Its especially important for a couple to consider that one spouse can not exhaust their resources for long term care expenses and leave the second spouse destitute (or significantly degrade their lifestyle).

I think many people are unsure what long term care looks like. What kind of expenses are incurred. How care is provided. I've talked to some of you that have experience in this through providing care to your parents. I have this experience for my mom. Long term care is not a bogeyman. It's just another type of healthcare expense that needs to be factored into our retirement planning.

One of the big unknowns for most of us is how much money do we need to cover healthcare costs in retirement. Fidelity Investments estimates around $260,000 on average for a 65 year old couple during retirement. The Employee Benefit Research Institute has studied this question and offers more clarity than Fidelity's estimate. They found that prescription drug expenses will play a big role in determining the total expenses. A couple with lower drug expenses might need $158,000, while a couple with high drug expenses might need $392,000. These estimates typically include insurance premiums and out of pocket expenses. Importantly, they do not include expenses for long term care.

The reality of healthcare expenses for each of us is going to be affected by a couple of factors. One is whether you are a man or woman. Another is whether we have a healthy lifestyle. And finally, whether we encounter a major medical situation such as cancer, parkinsons, ms, or others.

The important thing is to factor a reasonable estimate for healthcare expenses in our retirement planning. Even though this will be just an estimate, and one that is projected out for perhaps 30 years, it's better to have evaluated some expense then blithely assume everything will be normal.

Next article: long term care expenses.  

I often hear a comment from gen y's and x's that they don't count on getting social security benefits. I understand their doubts, but quickly add my opinion that social security will be available. And significantly, that it is likely to be an important element of their retirement income.

My point isn't that social security benefits won't change, there are a number of proposals being floated by both parties, rather that at this stage social security is a societal and cultural obligation the likes of which can not be easily changed.

When I model peoples retirement income, it is immediately evident that social security income is critically important for virtually everyone. Of course, there are those persons that have a large amount of wealth and naturally social security is insignificant for them. What is surprising is how much an impact social security income means for many of us that are considered wealthy. I use the words “critically important” to convey the importance of probability of success in retirement. Retirement projections are just that, a projection with an effort to determine the probability outcome (high, medium, low) that the income stream will sustain a certain level of consumption over the life times of the person(s). Take out social security income and the probability for maintaining most people life style drops precipitously.

I suspect that many people have never looked at a reasonable projection of their retirement life. Simple calculators don't provide a very accurate picture. A recent study highlighted the enormous disparity in outcomes when testing many of the online calculators. Its worth some effort to get a reasonable projection. You don't need to (and shouldn't) sign up for an expensive financial plan to arrive at this. I do this for a nominal flat fee.

Take the financial literacy test. Here's a suggestion, ask your older kids to take the test. It's only six questions. This is a fun and easy way to engage your older children on the topic of financial knowledge.

http://www.usfinancialcapability.org/quizzes.php

This quiz was put together by the FINRA Investor Education Foundation, and launched in 2009. Input was also provided by the Department of the Treasury and the President's advisory council. The purpose was to create a benchmark of basic financial literacy across the U.S. At six questions, this quiz isn't going to delve into lots of subject areas. But, why not start here. You'll have fun seeing where you rank. After completing the quiz you'll get a score (number correct), an explanation of the correct answers. You can see how you compared with averages nationally and from each of the states.

The most important element in the quiz is whether people understand the significance of compounding. Both debt and investments have interest rates that compound over time. Making investments early allows compounding to work to our benefit. Allowing debt to accumulate early ends up straining our future standard of living (if not sinking the proverbial boat).

And that's why this is such an important topic for our kids to learn.

This isn't an article about the financial stability of the social security retirement trust. When asked, my opinion is that the trust fund will be funded, one way or another, such that it will provide benefits in line with those provided today. And, that it will work for everyone contributing into the system.

Rather, this article is about how we each determine when to start our own benefit. Most people are aware of the “window” to begin benefits as early as age 62, and as late as age 70. The most common question I get is, what is the break even date given that our benefit at full retirement age (66-67) will be decreased for taking it early and increased for taking it later. I tell people that's a good question, but actually this question overlays another more important question. How long will you live? That's not a flip question. We need to spend some time, and honest assessment, to at least come up with a guesstimate. If you're having trouble answering that I suggest a longevity test that you can take. You can factor the outcome from that with your thoughts.

How long will you live is just one important factor when considering when to start taking social security. There are a number of personal situations that affect this decision. In fact, there can be thousands of permutations used to determine the optimal strategy for maximizing your social security benefit. But, the important point isn't just that you determine the maximum strategy. For most people, social security benefits are an important income stream throughout retirement. So, the question to ask is how does this fit in with everything else? That's an interesting discussion I'd be happy to have with you.

In part one of this topic I outlined the danger for target date funds at the later stages of your working life. In summary, after you've accumulated a meaningful amount of money your investment risk increases simply because the amount of money at risk is much larger and the timeframe to recover from a loss is limited. Target date funds do not account for the present state of the market in determining how to allocate the investment account at any time. Their simply following a preset “glide path”.

In part two I want to direct your attention to how target date funds are used in retirement. There are two different but interrelated goals for investments in retirement. First, provide a source of income, while second, maintaining (or building) wealth. On the one hand we want to create a consistent income stream for daily living. We want that income stream to be sustainable throughout our whole retirement (end of life). On the other hand we want to control the volatility of the account. Keep it steady. We don't want big ups and downs in the balance over time.

The problem is that while it may seem that the two goals are consistent, (steady income & steady balance), in fact pursuing both can be self defeating if you're relying on a target date fund. You see, most target date funds are concerned with just one aspect, controlling the volatility of the balance. It's not concerned with how to ensure there is a steady income stream over your lifetime.

Here's the important point. Creating a consistent income income stream and managing the account balance are two separate tasks. They are interrelated, and each needs to be managed properly to achieve success. The target date funds usually rely on bond funds to provide a steady (low volatility) account balance. As we learned in part one of this article, it does that without any consideration for the present state of the market. During retirement the target date funds simply assume that the bond funds will have low volatility and hence protect against major downturns in the market. In addition to that, they also fail to consider how the rate of return of the fund will support an income stream that most people want to be consistent over their entire lifespan.

In real life we need to manage and accept an appropriate level of volatility in our account balance in order to maximize the longevity of the income stream. Done properly, the account balance should be exposed to various investment options in order to capture returns in excess of bond funds for the very reason that bond funds may fail to provide the growth needed over your lifetime.

I'll end on this last note. Bond funds are often considered to be conservative (safe) investments with low downside risk. In fact, they can be subject to major and extended downturns. While individual bonds offer a degree of safety since they actually mature, target date funds are most commonly utilizing mutual funds with no termination date. If (when) bond yields rise in the future, the value of the bond fund shares will decline. This decline shows up in your account balance. We can only sustain consistent income withdrawals if our investment strategy achieves the level needed to extend our withdrawals to a reasonable life span.

It takes some thoughtful effort to understand how we are going to fund our retirement. It's worth the time and effort to understand this sooner than later.

Target date retirement funds are a popular choice (often a default choice) for many defined contribution retirement plans (e.g. 401k, 403b, 457). These funds highlight their “glide path”, smoothly transitioning the investor from equity holdings (higher volatility) to bond holdings (lower volatility). All based on our age. This seems sensible. Until you dig just a bit deeper.

Question: what exactly do we want a target date fund to do? Accumulate value before retirement? Provide income in retirement? I think many people want it to do both. The question is, how well does it do one or the other, or both? Let's stop for a moment and consider this. We'll probably work (accumulating) for 35-40 years. On average we'll be retired (decumulating) for 20-25 years.

Let's talk about the accumulation phase first. We'll look at the decumulation phase in the next article. Here's an important point. How much you save when you are young is more important than the investment strategy. It takes most people quite a bit of time to save a meaningful amount of money when you start from zero. It's only after you've built up your savings, usually 10+ years, that it really begins to matter what the investment strategy is. Because its at that point that the return from investing begins to affect the account balance. A 10% gain or loss on $10,000 is $1,000. A 10% gain or loss on $500,000 is $50,000. At the later part of your working years, the total amount of potential gain or loss becomes increasing important. The last five years of your working life could see your retirement balance double! Or, conversely fall by 50%..... A big gain is a huge win. But, a big drop can completely derail your retirement plan.

The critical (and I mean negative) attribute for target date funds is that they don't adjust for anything happening in the markets. They just blindly transition allocations from equity to bonds whether it makes sense or not. That's the fundamental weakness for target date funds. Their “set it and forget it” glide path is oblivious to the present environment. When you're young and just beginning to accumulate money most target date funds work just fine. But, when you have finally accumulated a meaningful amount of money your investment risk has increased. To be clear, this has nothing to do with your tolerance for risk. Rather, it has all to do with your capacity for risk (loss).

It's fine to use a target date fund early in your working years. However, you can not be complacent once you've accumulated a meaningful amount. You need to become more deliberate.

Next up, what about target date retirement funds in retirement?

It seems like pitches for timeshares come in waves. You get mail and robo calls one month, and don't hear any pitches for perhaps several months. Then you get the pitches again. Its a game of marketing. It's crucial that the pitch hit you at just the right time. If you are constantly getting pitched, you easily develop a defense to it. But, when its been awhile and you happen to be thinking of how and where you could get away... that's when you're vulnerable. People ask me whether a timeshare is a good investment. If you listen to the pitches, it's the best deal ever... and right now! Hmmm. Not so fast.

It turns out that timeshares can be a good investment for some people, and a lousy one for others. One thing is for sure. The time to determine that isn't during a “free” visit that accompanies most pitches. Like many financial decisions there are two facets that should align. One is personal, that is, how will this meet your needs and expectations? There's a lot to consider in this. The second is cost, that is, how much am I paying for this experience. We usually factor in the entry cost, but don't accurately factor in the exit cost. Here's a tip. If you're considering a timeshare, take the time to investigate the secondary market. You know, the one where existing owners are trying to sell their timeshare. You may be amazed at the discount from original price. (you may also be surprised how many are up for sale).

Most of the time a timeshare should not be considered an investment. Instead, it needs to closely align with your personal interests. After that it's a matter of accurately assessing the costs both going in and getting out.

At some point as people get older they begin to consider just how will the assets they accumulated be distributed to their heirs. Most people have a will (though there are those that don't for one reason or another). They may also rely on beneficiary designations on their retirement accounts. This is a pretty straight forward way to convey many assets. But often we need to consider situations that aren't so straight forward. For instance, what about second marriages when there are kids from the first? Or, what if we are concerned with a young persons ability to properly handle (a bundle of) money?

The desire to avoid probate is probably the most common reason people consider a trust. There are a variety of good reasons to avoid probate. It takes time (sometimes a lot of time, like a year), incurs a tax on the value of the property, and finally is likely the last thing your executor wants to deal with given the situation (your death), and so people often hire a lawyer for the process (more expense).

If you own real estate out of state, then a trust can be very useful. Real estate generally has to be probated in the state where it is located. So, if you live in MD or VA, and own beach property say in DE or NC, that means separate probates in your home state and the state where your beach property is located. A trust can bypass this probate process.

While there's a lot to know about trusts, their advantages and drawbacks, it also isn't so complex that most people would benefit from exploring the topic further. If you have questions about trusts, give me a call or send me an email. I'm happy to talk with you.