As banks book losses and high ranking financial services executives pursue other interests, people still need to prepare for retirement. Here are a few things to think about.
Market Volatility. The downswings of the market are what the long term part of long term investing is all about. Unlike an elementary school soccer game, where everyone gets an award, the stock markets are not meant to build self-esteem. You will lose as well as win. Maximize your chances to win by focusing on the long term. Avoid panic selling, and consider judicious purchases during market swoons.
Diversify. The future direction of the stock, bond and other financial markets gets murkier by the day. The smart play is to diversify your investments. That way, you place a number of different bets to multiply your chances of success while reducing the risk of a big loss. Concentrating one’s bets was the strategy a lot of investment and commercial banks pursued with mortgages and leveraged buyout financings. When you swing for a home run, you have a good chance of striking out. There were many strike outs this past year. Most likely, 2008 will be a year in which many investors hit singles, at best. Diversify your investments. Look at our model financial plans for ideas (http://www.uncleleosden.com/Step16aModelPlans.html).
Step up your savings. With the short term direction of the stock markets uncertain, one way to boost your retirement portfolio is to increase the amounts that you save. Maybe that, in your mind, calls for sacrifice. Well, retirement with only limited resources also calls for sacrifice, maybe a lot of it. When you’re old, perhaps ill, and unable or unwilling to work, sacrifice will be painful. Save more now and buy some peace of mind. As we discuss at http://www.uncleleosden.com/Introduction.html, you’ll have only a finite amount of income during your working years, and if you don’t save some of it, you won’t have much of a retirement.
401(k) Changes. Employers are now starting to automatically enroll new employees in 401(k) plans unless the employees opt out. It used to be that employees had to opt in, and large numbers of them didn’t. So they missed important opportunities to build wealth for retirement. 401(k) investment choices are now often being simplified, which should make things easier for participants. If you haven’t enrolled in your employer’s 401(k) plan, enroll. If you’re automatically enrolled, don’t opt out. Most employers are withholding only 3% of automatic enrollees earnings, and perhaps making a matching contribution in the same amount. That’s not enough for a solid retirement. You should try to save at least 15% to 20% of your earnings, either inside or outside a retirement account. See http://blogger.uncleleosden.com/2007/04/goals-for-retirement-saving-and-why.html.
Many 401(k) plans offer lifecycle or target date retirement funds as investment options. These funds allocate your savings to age-appropriate mixes of assets. Your money is invested aggressively if you’re young and have decades to go before retirement. As you grow older, the mix of investments is gradually made more conservative to solidify your gains. This is what you should be doing anyway if you manage your money yourself. The lifecycle or target date fund does the work for you, so your life is simplified.
IRA Contribution Limits. In 2008, you’ll be able to contribute up to a combined total of $5,000 to your traditional and Roth IRAs, or $6,000 if you are 50 or older (including those who turn 50 during 2008). You can still make contributions for 2007 up through April 15, 2008 (but the limits are $4,000, or $5,000 if you were 50 or older in 2007). If you participate in any employer-sponsored retirement plan, such as a 401(k), 403(b), SIMPLE IRA or SEP-IRA, contact your plan administrator for information about the plan’s contribution limits and any matching contributions.
Proprietary reverse mortgages. These mortgages are large reverse mortgages, ones that exceed the $363,000 loan limit for FHA-backed reverse mortgages. Most reverse mortgages issued today are guaranteed by the FHA, which is a great comfort to the lender. But the FHA won’t back reverse mortgages above $363,000. So banks are starting to offer proprietary reverse mortgages in higher amounts (perhaps as much as $10 million, if you have a mansion that would support such a loan). Like any reverse mortgage, these jumbo loans let you pay off existing loans, take out additional equity as a lump sum of cash, and/or establish a line of credit. The loan and interest are repaid when you die, move out permanently or sell the house (or mansion). You don’t need to make monthly payments. In this way, a reverse mortgage can simplify your life.
The downside is that perhaps all of the value of your house will go to repaying the reverse mortgage. Your heirs may get nothing from the house. You also need to safeguard the cash or credit line that the proprietary reverse mortgage gives you, because you probably won’t be able to borrow against the house again. The reverse mortgage will have a first lien on your house and will probably preclude another home equity loan. These are serious considerations, and you should think carefully before taking out a reverse mortgage.
Animal News: is the Mayor a dognapper? http://www.wtop.com/?nid=456&sid=1329766.
Showing posts with label reverse mortgage. Show all posts
Showing posts with label reverse mortgage. Show all posts
Thursday, January 24, 2008
Sunday, June 17, 2007
Reverse Mortgages
Many, and perhaps most Americans, enter retirement with a modest amount of savings and a house. They have Social Security, and if they're lucky, a pension. Social Security payments are increased for inflation, but most pensions are not. Money may eventually get tight. The cost of living goes only in one direction, and it isn't down. Property taxes increase over time. And medical expenses rise as one grows older. If there isn't a large pool of savings to tap into, what does a retiree do, especially one that still wants to live at home?
Increasingly, retirees have been taking out reverse mortgages. A reverse mortgage is a way for a person who is at least 62 to take the equity out of his or her home, with a unique feature. The homeowner doesn't have to make any payments until he or she leaves the house permanently (e.g., to move to an assisted living facility), sells the house, or passes away. This is a very convenient arrangement for a person without much savings or income. The homeowner can get a lump sum, a line of credit or regular monthly payments.
There must be a catch, you say. And if you said that, you'd be right. Reverse mortgages are a very expensive way to borrow. Part of the problem is the deferral of repayment. Since the homeowner doesn't have to repay the loan for years, or potentially even decades, the interest on the loan will accrue unpaid for a long time and will have to come from the value of the house. The longer the homeowner's life expectancy, the less he or she will be able to borrow. That's because much and even most of the home's value has to be set aside for interest payments. With the best kind of reverse mortgage available, the "home equity conversion mortgage" (HECM), a homeowner at age 62 can borrow around half the value of the house at current interest rates. The older you get, the more you can borrow because your shorter life expectancy means a smaller amount of interest will accrue.
Reverse mortgages also have very high closing costs, potentially as much as 10% or more of the value of the loan. The charges include an origination fee, a mortgage insurance fee, and various closing costs. Fees this large can significantly increase the effective cost of borrowing.
Another consideration is that the cost of repaying a reverse mortgage could consume virtually the entire value of the house. If the homeowner wanted to leave the house behind as an inheritance, a reverse mortgage pretty much switches the inheritance over to the bank.
Americans, on the whole, are lousy savers. They do like to own their homes, however, and will often do whatever they can to own the old homestead by the time they get the retirement watch. With a cash-poor, house-rich retired population, it's no wonder the reverse mortgage has grown in popularity. And with the Baby Boom generation closing in on its golden years, there's no reason to think this trend will change.
Needless to say, the financial services industry hasn't overlooked reverse mortgages. More and more financial institutions are offering them, and there are some indications that the fees may be diminishing a bit. In fact, people with second homes may soon be able to get reverse mortgages on them. Many seniors are targeted by mass mailings touting reverse mortgages.
It's important to be very careful with a reverse mortgage. The math is quite a bit more complex than a traditional mortgage's math (and that's not necessarily simple). Older folks may not understand all of the nuances of the transaction. The elderly make easy targets for fast-talking sales people. In the worse case scenarios, they may be persuaded to take out a reverse mortgage and invest the money in an annuity or other financial product that pays the sales person a juicy commission. That is a bad financial move, but some unscrupulous sales people evidently have done this.
Elderly people may also get less legal protection. They can have wobbly recollections. They sometimes develop mental impairments, and cannot testify. And they might even pass away before the bad guys can be successfully prosecuted. That's why crooks love to prey on them.
If you're thinking of taking out a reverse mortgage, you'll be required to get financial counseling first. Listen closely to the counselor--he or she may have suggestions for other ways for you to deal with your financial problems. Also, talk to your family and friends. You don't want your only source of information to be a sales person.
If it's your parent, or grandparent, who is thinking of getting a reverse mortgage, be willing to help out. Maybe, even offer to help out. It's always difficult for a younger generation to involve itself in an older generation's finances. But you can be respectful and helpful at the same time. Deal with your elder the way you'd like dealt with when you're the elder. A reverse mortgage may be a very good idea, or a very bad one, and you can help out either way.
For more information on reverse mortgages, please go to Uncle Leo's Den at http://www.uncleleosden.com/Step18FinanceinRet.html#reverse.
Strange News: another guy gets his 15 minutes of fame. http://www.wtop.com/?nid=456&sid=1168649.
Increasingly, retirees have been taking out reverse mortgages. A reverse mortgage is a way for a person who is at least 62 to take the equity out of his or her home, with a unique feature. The homeowner doesn't have to make any payments until he or she leaves the house permanently (e.g., to move to an assisted living facility), sells the house, or passes away. This is a very convenient arrangement for a person without much savings or income. The homeowner can get a lump sum, a line of credit or regular monthly payments.
There must be a catch, you say. And if you said that, you'd be right. Reverse mortgages are a very expensive way to borrow. Part of the problem is the deferral of repayment. Since the homeowner doesn't have to repay the loan for years, or potentially even decades, the interest on the loan will accrue unpaid for a long time and will have to come from the value of the house. The longer the homeowner's life expectancy, the less he or she will be able to borrow. That's because much and even most of the home's value has to be set aside for interest payments. With the best kind of reverse mortgage available, the "home equity conversion mortgage" (HECM), a homeowner at age 62 can borrow around half the value of the house at current interest rates. The older you get, the more you can borrow because your shorter life expectancy means a smaller amount of interest will accrue.
Reverse mortgages also have very high closing costs, potentially as much as 10% or more of the value of the loan. The charges include an origination fee, a mortgage insurance fee, and various closing costs. Fees this large can significantly increase the effective cost of borrowing.
Another consideration is that the cost of repaying a reverse mortgage could consume virtually the entire value of the house. If the homeowner wanted to leave the house behind as an inheritance, a reverse mortgage pretty much switches the inheritance over to the bank.
Americans, on the whole, are lousy savers. They do like to own their homes, however, and will often do whatever they can to own the old homestead by the time they get the retirement watch. With a cash-poor, house-rich retired population, it's no wonder the reverse mortgage has grown in popularity. And with the Baby Boom generation closing in on its golden years, there's no reason to think this trend will change.
Needless to say, the financial services industry hasn't overlooked reverse mortgages. More and more financial institutions are offering them, and there are some indications that the fees may be diminishing a bit. In fact, people with second homes may soon be able to get reverse mortgages on them. Many seniors are targeted by mass mailings touting reverse mortgages.
It's important to be very careful with a reverse mortgage. The math is quite a bit more complex than a traditional mortgage's math (and that's not necessarily simple). Older folks may not understand all of the nuances of the transaction. The elderly make easy targets for fast-talking sales people. In the worse case scenarios, they may be persuaded to take out a reverse mortgage and invest the money in an annuity or other financial product that pays the sales person a juicy commission. That is a bad financial move, but some unscrupulous sales people evidently have done this.
Elderly people may also get less legal protection. They can have wobbly recollections. They sometimes develop mental impairments, and cannot testify. And they might even pass away before the bad guys can be successfully prosecuted. That's why crooks love to prey on them.
If you're thinking of taking out a reverse mortgage, you'll be required to get financial counseling first. Listen closely to the counselor--he or she may have suggestions for other ways for you to deal with your financial problems. Also, talk to your family and friends. You don't want your only source of information to be a sales person.
If it's your parent, or grandparent, who is thinking of getting a reverse mortgage, be willing to help out. Maybe, even offer to help out. It's always difficult for a younger generation to involve itself in an older generation's finances. But you can be respectful and helpful at the same time. Deal with your elder the way you'd like dealt with when you're the elder. A reverse mortgage may be a very good idea, or a very bad one, and you can help out either way.
For more information on reverse mortgages, please go to Uncle Leo's Den at http://www.uncleleosden.com/Step18FinanceinRet.html#reverse.
Strange News: another guy gets his 15 minutes of fame. http://www.wtop.com/?nid=456&sid=1168649.
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