Professor Jamie Hopkins Co-Director of The American College New York Life Center for Retirement Income
Home Equity As A Retirement Income Source Webcast Overview The American College of Financial Services Why a focus on Home Equity? Understanding Your Client New Research Home Equity Income Strategies Questions?
Leadership Mission: Elevate the retirement-income planning knowledge of financial services professionals in order to improve retirement security for all Americans Jamie Hopkins, Esq, LLM, RICP Co-Director, Professor of Taxation Dave Littell, JD, ChFC, CFP Co-Director, Professor of Taxation Priorities & Initiatives: Research - RICP Retirement Income Literacy Index Education - Retirement Income Certified Professional (RICP ) Video Library - retirement.theamericancollege.edu Thought Leadership and Visibility
Retirement Income Certified Professional (RICP ) Practical. Current. Comprehensive.
Why Home Equity?
What is Retirement Income Planning? Meeting client s financial goals Income needs Contingent expenses Legacy goals Address retirement risks Longevity Risk Long-Term Care Risk Sequence of Withdrawal risk Public Policy Risk
Retirement Income Planning Process 1.Evaluate the client s current situation 2.Identify and prioritize retirement goals 3.Estimate retirement income needs 4.Identify sources of income and assets available to generate retirement income 5.Make a preliminary calculation of the client s preparedness 6.Develop strategies for addressing a shortfall 7.Consider legal and tax issues that can derail plan 8.Consider retirement risks in developing solutions 9.Determine an appropriate strategy for converting assets into income 10.Integrate all considerations, present alternatives, and agree upon a plan for retirement
Retirement Income Planning Process Step 4: Identify sources of income and assets available to generate retirement income
Equity and Non-Equity Assets for Average Married Couple at Age 65 32% 68% Source: U.S. Census Bureau, Survey of Income and Program Participation, 2008 Panel, Wave 10
Understand Your Client
Retirement Income Planning Process Step 2: Identify and Prioritize Retirement Goals
New Research Home Equity and Retirement Planning Literacy Survey 1. Understand attitudes about the importance of housing decisions for those nearing or in retirement. 2. Gauge the knowledge levels of those nearing or in retirement with regards to reverse mortgages. 3. Find ways to improve the knowledge base of those nearing or in retirement with regards to home equity reverse mortgages.
Data & Research Methods A total of 1,003 people completed the survey, 537 males and 466 females between the ages of 55 and 75, with at least $100,000 in investable assets and $100,000 in home equity. The Survey s knowledge questions were created by College professors and reviewed by industry experts to ensure accuracy. This study consisted of an online survey that was conducted by Greenwald & Associates through the Research Now only survey panel. The panel members are recruited through a controlled mix of both online and offline methods, by using By-Invitation-Only acquisition to avoid attracting professional survey takers. Research Now does operate a pay all incentive model where members are paid if they complete the survey.
Topline Demographics Who Responded? 44% had a comprehensive written retirement plan 60% had a financial advisor 60% were over the age of 62 53% were male and 47% were female 19% had home equity of $500,000 or more 30% had between $100-200,000 in home equity 14% had considered a reverse mortgage
Topline Results A Desire to Age In Place 88% of respondents had thought about where they will live in retirement 83% said they want to live in their current home for as long as possible This desire increased along with age 58% expected to stay in the home for 10+ years 21% expected to spend 20+ years in home and again this was higher for older individuals Only 5% said they would rent if or when they leave their home
Topline Results What about as Legacy Goal Roughly 20% listed leaving the home as a legacy asset as extremely important 45% said it was not important!
Topline Results Home as an Income Source? Have you considered how you will use your home equity in retirement? 44% said they have considered home equity 56% said they have not considered home equity A written comprehensive plan had a big impact on considering home equity 52% with a plan considered it, while only 38% without a plan considered home equity
Topline Results Home as an Income Source? Do you feel comfortable using your home as an income source? Men felt slightly more comfortable 28% compared to 21% of women Those with $500,000 in home equity felt slightly more comfortable with 28% Only 25% felt comfortable spending home equity in retirement
Overview of Client Has a lot of wealth in home equity Has likely thought about living in retirement but may not have thought about home equity as an income source Roughly 25% felt okay with using home equity as an income source 20% want to use home equity as a legacy asset Incredibly strong desire to age in place and not leave the home (this desire will grow as they age)
Home Equity Income Solutions
Home Equity Income Solutions Sell Home Age In Place 1. Downsize 2. Sell Home and move to CCRC 3. Live with Family/Charity 4. Sale-Leaseback 5. Home Sharing 6. Special Purpose Loan 7. Traditional Line of Credit or Home Equity Loan 8.Reverse Mortgage
Downsizing/CCRC/Rent Sell house free up cash Top three reasons move closer to family, reduce expenses, change in health Most people want to age in place and stay at home for as long as possible Where you live now has an impact city dwellers more likely to want to move Only 2% of the 36 million Americans that move in a year (less than 1 million) do it because of retirement Can rent? Move to a CCRC? Improve Cash flow? Most home owners don t like going to rental after owning a home Improve retirement happiness? Research shows those who moved were more satisfied
Home Sharing Golden Girls Housing Situation Home sharing is mostly used by senior women Good way to get companionship for senior with home and increase income/decrease expenses There are four million women over age 50 living in a house with at least two 50+ women (AARP) Over 20 different state home-share agencies now in existence National Shared Housing Resource Center
HELOC Home equity line of credit Tap into home equity for a short term need Research shows its best when used for 12-18 months Can be used to help with major repairs or expenses leaky roof, outfit a bathroom, etc. Perhaps engage in debt shifting strategy Can you pay off credit card debt, student loan, etc. with higher interest? What are tradeoffs? Downside creates an outflow of cash, is not a permenant line of credit. Often a 10 year draw period Lots of variations out there If not repaid you can lose your house through a foreclosure First few years of repayment often just interest not principal
Single Purpose Loans Often build like a reverse mortgage offered through private lenders, organized by the State Example: RAM Reverse Annuity Mortgage in Connecticut Must be age 70 and have a long-term care need Interest rate is between 4.5-5% Closing costs - $1500 Income guidelines to qualify Heirs not on hook for remaining debt Due when house is sold, some payments annually Downside assets sought to pay the debt
Reverse Mortgage HECM Home Equity Conversion Mortgage Non-recourse loan (bank doesn t get windfall) You pay for insurance from the FHA/HUD Multiple distribution options tenure, lump sum, line of credit Line of Credit is seen as most favorable for financial planners All homeowners must be age 62 (can have non-borrowing spouse under age 62 but can t be on the title of the home) Mortgage does not need to be entirely paid off Due when you stop using the home as your principal residence move out, die, go to nursing home, sell house
A Deeper Dive into Reverse Mortgages
So What's The Issue with Reverse Mortgage Home Equity has not always been part of the retirement income discussion Average age is 71 Historically a lot of people used them poorly Lots of misunderstandings Compliance issues abundant Compounding interest rates are not ideal Research was lacking on best strategies Negative perception Overly aggressive marketing Product and regulations kept changing
Reverse Mortgage: Improved Consumer Protections 2013 Limit on Lump Sum Withdrawals (Initial Disbursement Limits) Often restricted to 60% of the Principal Limit in the first year Initial Mortgage Insurance Premiums restructured Either 0.5% or 2.5% to FHA (in general the fees and costs have gone down over the past few years) 2014 Non-Borrowing Spouse Protection May be able to defer the due and payable status for spouses under 62 Still does not apply to all situations move to nursing home 2015 Financial Assessment Basically a suitability model that looks at income, credit, etc.
Topline Results Literacy Average (mean) correct was 4.8/10 Comprehensive plan 5/10 compared to no plan 4.6/10 Roughly 10% of respondents scored a 0 correct! Two Biggest Misconceptions: When you should use home equity in retirement (27% correct) Do heirs have to repay the debt above and beyond the house value (25% correct)
Knowledge Check Questions 1) The earliest age at which a person who is the sole owner of a home can enter into a reverse mortgage is age 62. 2) If the value of your home has grown since you bought it, entering into a reverse mortgage would result in a taxable gain to the homeowner. 3) Under a reverse mortgage the homeowner generally is not required to repay the loan until he/she stops using the home as the principal residence. 4) You cannot enter into a reverse mortgage unless your home is completely paid off and there is no outstanding mortgage balance. 5) One downside with a reverse mortgage is that if the home goes under water (the home is worth less than the amount owed to the lender), the homeowner, estate, or heirs need to pay off the additional debt. 6) The only currently available form of payment from a reverse mortgage is a single lump sum distribution. 7) The amount of money that you can borrow as a reverse mortgage depends on the age of the youngest borrower or eligible non-borrowing spouse, the current interest rate, and the value of the home. 8) A reverse mortgage is different from a traditional mortgage in that the homeowner is not responsible for any property taxes or insurance payments. 9) Generally using a reverse mortgage early in retirement to support a retirement plan is better than as a last resort towards the end of retirement. 10) Because of concerns about poor money management and financial elder abuse, the Government has restricted the use of reverse mortgage proceeds to health care expenditures, long-term care costs, home improvements, and tax payments.
(Take the Quiz)
Consider Reverse Mortgage? Have you considered using a reverse mortgage as part of your retirement plan? 14% of respondents have considered a reverse mortgage
Why didn t you get a Reverse Mortgage? Why did you decide not to enter into a reverse mortgage? Main reason was they didn t need it because of sufficient income (44%) Age restriction (too young) was second response with 18% 10% said they were just not ready 9% found it too risky or not beneficial 6% considering other options 3% planning on moving 3% because they are not retired yet
Benefits of Reverse Mortgage? I view reverse mortgages as a positive tool that can improve my retirement security. Average response was a 3/7 (disagree) Only 10% of respondents strongly agreed with the statement 35% strongly disagreed The general view was that reverse mortgages are not a good tool for their retirement security (existence of a plan or advisor did not seem to matter)
Perceived Reverse Mortgage Knowledge How knowledgeable do you believe you are with regards to reverse mortgages? Average response was a 4.1/7 (moderately knowledgeable) 20% stated they were very knowledgeable (55% passed the quiz) Only 14% stated they had very little knowledge and only 5% stated that they were not knowledgeable at all
How To Use A Reverse Mortgage
So how do you use a Reverse Mortgage Properly? First just bring it up include it as part of the home equity discussion Do your due diligence! Strategy to defer S.S. Run the numbers if person is going to retire at 62 would they benefit from deferring S.S. by taking a term RM borrow at 4% - get 7-8% increases each year Line of Credit Creates downside protection for housing prices Creates a non-market correlated asset great for a systematic withdrawal strategy Helps diversify your home single most non-liquid and non-diversified asset Cash Flow Management flip your traditional mortgage to a reverse mortgage Tax efficiency Roth Conversions/tax efficient withdrawals if you are moving up your taxable income to certain levels could be better to withdrawal from home 28%- 33% federal tax rate jump perhaps with additional 3.8% could be close to 9-10% tax increase in certain areas
So how do you use a Reverse Mortgage Properly? Pay off existing mortgage Fund home renovations to age in place HECM for purchase of a new home Spend home equity first to leverage investable asset growth potential Coordinate home equity to mitigate sequence of returns risk Use tenure payments to reduce portfolio withdrawals perhaps to keep them at a sustainable level (4-6%) Tenure payment as annuity alternative Social Security Delay Bridge Tax Bracket management Roth Conversions Long-Term Care Insurance or Care Payments Can be used as an end of life planning source Can protect home value Contingency fund Thanks to Professor Wade Pfau
Growing Body of Reverse Mortgage Research Early establishment of the HECM line of credit in the current low interest rate environment is shown to consistently provide higher 30-year survival rates than those shown for the last resort strategies. The early establishment stagey was shown to be as high as 85% greater than the last resort strategy s survival rates. Pfeiffer, Schall and Salter JFP HECM Reverse Mortgages: Now or Last Resort? Sustainable withdrawal rates could be increased by using a standby reverse mortgage. Pfeiffer, Salter, Evensky Increasing the Sustainable Withdrawal Rate Using the Standby Reverse Mortgage A line of credit reverse mortgage can help reduce sequence of returns risk and improve portfolio survival rates. Pfeiffer, Salter, Evensky Standby Reverse Mortgages: A Risk Management Tool for Retirement Distributions Opening a line of credit early in the start of retirement and delaying its use until the portfolio is depleted helps provide downside protection. A key theme is that there is great value for clients to open a reverse mortgage line of credit at the earliest possible age. Wade Pfau, Incorporating Home Equity into a Retirement Income Strategy With a 30-year spending horizon and first-year withdrawal of 6.0 percent, reverse mortgage scheduled advances as a portfolio supplement give spending success levels of 88 to 92 percent. Gerald C. Wagner, Ph.D. The 6.0 Percent Rule
Growing Body of Reverse Mortgage Research These strategies were tested: (1) the conventional, passive strategy of using the reverse mortgage as a last resort after exhausting the securities portfolio; and two active strategies: (2) a coordinated strategy under which the credit line is drawn upon according to an algorithm designed to maximize portfolio recovery after negative investment returns, and (3) drawing upon the reverse mortgage credit line first, until exhausted. The model also shows that the retiree s residual net worth (portfolio plus home equity) after 30 years is about twice as likely to be greater when an active strategy is used than when the conventional strategy is used. For example, the 30-year cash flow survival probability for an initial withdrawal rate of 6 percent is only 55 percent when the conventional strategy is used, but is close to 90 percent when the coordinated strategy is used. Sacks and Sacks 2012 Feb. JFP, Reversing The Conventional Wisdom: Using Home Equity to Supplement Retirement Income
Growing Body of Reverse Mortgage Research 1. Borrow early and use the proceeds early 2. Borrow early but defer the use of proceeds until later 3. Monthly payments (tenure) 4. Borrow after portfolio down years 5. Salter, Pfeiffer, and Evensky Standby Reverse Mortgage strategy (from the August 2012 Journal paper) 6. Borrow late, use late (the last resort) All five strategies (not including the last resort ) improve a portfolio s sustainable spending rate. Also so benefits of setting up the RM early and using it early. Tom Davison & Keith Turner, Journal of Retirement Fall 2015, The Reverse Mortgage: A Strategic Lifetime Income Planning Resource
Concluding Thoughts & Takeaways
Moving Forward 1.Get Educated! - Learn about RI planning and Home Equity 2.Get Involved! -Conferences, talk to individual planners, talk to compliance 3.Stay Current! Follow the DOL changes, product developments, research 4.Start thinking about home equity as a potential income source!
Additional Information The American College New York Life Center for Retirement Income o http://retirement.theamericancollege.edu The American College Cary M. Maguire Center for Ethics in Financial Services o http://ethics.theamericancollege.edu Retirement Income Certified Professional (RICP ) designation o https://ricp.theamericancollege.edu Jamie Hopkins, Forbes contributor Twitter @jamiehopkins521 o http://www.forbes.com/sites/jamiehopkins
Retirement ebook Retirement Risks: How To Plan Around Uncertainty For A Successful Retirement
Retirement Planning ebook Retirement Success In 10 Steps: How To Stretch Your Dollar To Last Through Your Golden Years
Thank you! TheAmericanCollege.edu