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The Advisory Firm Newsletter:  June 2013

THIS MONTH IN PERSONAL FINANCE: Reverse Mortgages, Money Market changes, when to take Social Security benefits.


To kick off the summer thought we would explore a few topics of interest to those in retirement or close to it. Reverse Mortgages were hot prior to the real estate crash and are starting to gain traction again, so we will summarize the pros and cons of this tool for retirement strategies.

Reverse Mortgages - A Quick Summary:

If you watch any of the cable news shows you have no doubt seen former actors pitching Reverse Mortgages. These are the commercials where they talk about how you can turn your home equity into cash and never have another mortgage payment. So how exactly do these work?

A Reverse Mortgage is an FHA insured loan against your house, it is that simple. But unlike a conventional mortgage where you pay it back over a 15 or 30 year period, with a reverse mortgage you don't make payments. It is basically a trade where you trade the mortgage company your home equity and they trade you a monthly payout or lump sum. The mortgage company is foregoing the monthly payback in hopes of recouping their investment + interest down the road when you either sell the property or pass away and your estate hands over the keys to the house.

In the past Reverse Mortgages had a bit of a negative stigma as the closing costs were very high. All reverse mortgages are required to have Mortgage Insurance which can run as much as 2% of the home value in addition to standard closing costs, all told this could mean 3 1/2% in costs at the closing table. Newer products allow for much less in closing costs, but they limit the amount of cash that the borrower is able to take out of the home equity.

A couple of key facts:

  • you have to be 62 or older to do a reverse mortgage
  • the home has to be your primary residence
  • you have to maintain the property, pay your prop taxes and insurance
  • the loan is similar to going to the bank and getting a home equity line of credit against your house, the difference being you get the money and don't make any payments (they are deferred upon the sale of the home)
  • the loans are non-recourse meaning if you did a reverse mortgage and the real estate market tanked, you (or your heirs) are not liable for any loss the mortgage company incurs. Your heirs just hand over the keys and walk away.
  • the amount of equity you can pull from your home varies with age. If you did a reverse mortgage at age 62 you might get up to 50% of your equity out. If you did a reverse at age 82 you might get up to 70% of your equity out. (estimations only)

When would a reverse mortgage work for someone?

Prior to getting a reverse mortgage it would be advisable to consult a financial planner to have them review the entire picture, but here are some cases where this tool could be used:

  • you are retired and realize that you want to stay in your home through the remainder of your life, but the mortgage payment is eating up a big portion of your cashflow. Would having no mortgage payment plus extracting 60% of your existing equity help?
  • you are retired and would like to pay cash for a second home or rental. By extracting the equity in your primary residence with a reverse mortgage you now have funds to pay for this second home or rental and no primary mortgage.

These of course are very generic situations and as all tools there is a tradeoff (and that is giving up a good percentage of your home equity). While you may still be able to sell your home, payoff the reverse mortgage and walk away with cash in the future, you need to approach this as if you will live in your home for the remainder of your life.


SEC is pushing ahead with Money Market Reform:

Do you remember back in the Fall of 2008 in the midst of the Lehman Brothers implosion when the Reserve Primary Money Market fund "broke the buck"? There was a panic amongst money market customers that their $1 of safe money in the money market account was suddenly not worth $1. The fact is up to this time all money market funds have always displayed a NAV (net asset value) of $1, even as the underlying holding of the funds waiver and could be less.

Money Market funds have traditionally been a place for liquidity, you park your cash in them, write checks off the money market fund and earn some interest. However during times of extreme interest rate volatility money funds value can fluctuate. This is because the money fund is generally made up of very short term interest bearing investments such as treasury bills and commercial paper. In fact in times of really low rates the expenses of the fund itself may make the yield less than 0%!

The SEC has now proposed that Prime Institutional Funds have a NAV that fluctuates daily with market conditions, however*** they are proposing the Retail Money funds (what you guys use) continue to use a $1 NAV. They are also proposing allowing the funds to limit or prevent withdrawal in times of financial market stress.

In general, it should not be a cause for concern. You just need to understand what a money market fund is and the fact that it is different from an insured bank account. Many custodians have made a switch in investment accounts over the past few years to insured cash accounts vs. traditional money markets. While another financial meltdown is not anticipated just realize that money market funds can go through disruptions in extreme situations and while very rare, 2008 proved that it can have an impact.

When to take Social Security

The topic on when to take social security is one of the top questions I get as a planner when working with clients entering retirement. While there are many variables involved, I thought this chart might help visualize the differences in your cumulative benefit by taking your social security at age 62, 66 or 70.

This spreadsheet was run assuming a full retirement benefit of $2000/month at age 66 (assuming you turn 66 in 2018 ). Although the inflation calculation for SS is a moving target we just assumed a 3% annual increase for simplicity. The inflation adjustment starts next year whether you take your benefit early or delay. Hope that makes sense.

This chart may be a little difficult to read, if so click on it and it will bring up a larger version. The end result? About 10 years is the point you come out ahead by delaying your benefit. If you take your full benefit at 66, you will be about 76 before you come out ahead if you had opted to take your benefit at 62. Same for delaying until 70, you will be about 80 before the cumulative total is greater than by taking your benefit at age 66 (although about 76 to come out ahead from taking at 62).

Please note there are additional variables that you need to consider in taking your benefit and more complexities than simply looking at this chart, however for the general question of when you come out ahead by waiting, here it is:






James Daniel, CFP®

Have a great Summer!

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The Advisory Firm, LLC provides fee-only financial planning services for clients throughout metro Atlanta and North Georgia including the communities
of Alpharetta, Canton, Cumming, Dawsonville, Duluth, Dunwoody, Marietta, Midtown, Roswell, and Woodstock.

This newsletter if for informational purposes only. The information contained within should not be considered as financial advice nor soliciation
for financial services. Consult with your financial professional if you have any questions. The Advisory Firm, LLC is a fee-only financial planning company and registered investment advisor.