I am someone who believes in a Supernatural Creator. Thus, when coincidences happen, I always wonder if God’s thumbprint can be found tilting the scales to some degree.
So, let me share with you a recent situation I found myself in and you tell me God’s work is not involved.
I receive quite a few emails from folks who’ve seen my Youtube channel. Many tell me how appreciative they are of what I’m doing, which, of course, is great for one’s ego. Some congratulatory, as my channel has grown quite a bit. Others are questions about their own financial situation.
All of them are important to me. However, one in particular stands out. It was nearly a cry for help. A retired couple, both 68 years old, were worried sick they were going to be destitute in a few short years. They were down to their last 150k and needed to generate an extra $500 a month income to add to the $2500 a month they were living on.
$2500 a month for a couple in their late 60s… My friends, that isn’t much. Especially when you think about their Medicare premiums, Medigap and Part D, can easily take $500 a month.
So, what could they do?
And here is where the question of Divine Intervention needs to be considered.
I had literally, within that week, took it upon myself to learn more about reverse mortgages. For some reason, I have NEVER, EVER considered this product as a tool that retirees could use. I looked at reverse mortgages as a “scam”, as the esteemed Dave Ramsey tells us. They are “too expensive” as many others declare. You could “LOSE YOUR HOME” even, say more naysayers, even a recent Washington Post article.
However, for the past few years, a couple researchers I’m familiar with and follow regularly, Wade Pfau comes to mind, have made the case for reverse mortgages. Pfau is in my top 5 of must read authors, but I always overlooked his reverse mortgage books and other researchers. Not sure why; it just was never a top priority for me.
Then, out of nowhere, in my LinkedIn feed, a guy who I didn’t know but was connected to, came up regarding a presentation he was doing. This guy is a reverse mortgage specialist and for some reason, at this specific moment in time, my curiosity was piqued.
Long story short, I met with Blake, and even interviewed him, live on my Youtube channel, about reverse mortgages. I was stunned about what I didn’t know. In fact, I was embarrassed. So, I took it upon myself to learn more. Starting with Wade Pfau’s book on reverse mortgages, the updated version with the changes in the law regulating the product in Oct. 2017.
That same week, I receive the email from that retired couple desperate to generate an extra $500 a month.
So, where does all this lead.
Well, it is financial planning actually. How can we accomplish this couple’s needs but now we shall consider the entirety of their net worth, not just the $150k in investment accounts but also the fact they have a $130k home with NO DEBT on it.
We’re looking at $280k of net worth in which to generate income as opposed to about half that when only considering investment assets,with the inherent market risks that come. And this is what makes the reverse mortgage so valuable, there is nearly $6 TRILLION of equity stored away in peoples homes. Yet, NONE of it is being looked at as a way to enhance retirement!
This is crazy. All that equity, and it is not being used???
What I then suggested to these folks is a 3 pronged approach:
1. Suspend Social Security until they reach 70 in order to take advantage of the 8% a year earnings credits.
Mind you, they both were already on Social Security. But you can still suspend it and thus allow yourself to get those delayed benefits. It’s a huge win for them because Social Security is the best annuity in the world, especially if we can increase it by 8% a year for both of them.
2. Take a reverse mortgage out to generate roughly $300 a month, guaranteed, for the rest of their lives, which is called a TENURE payment.
The cost to implement a reverse mortgage is not cheap. First, you need to pay 2% of the APPRAISED value of the home. Not the assessed value, mind you. And not the loan amount either. The appraised value. So, in this case we’re looking at $2600.
This cost is an insurance premium that goes to the government’s ability to pay off the loan in case your loan value grows beyond the actual value of the house. Reverse mortgages are non-recourse loans, meaning you, or your estate, will never be upside down when it comes to paying the loan off.
There are also the typical appraisal fees, title insurance ( UGH!), and potentially an origination fee too.
These costs can all be funded into the loan and thus no cash is needed at the table for closing, which is what I’d recommend in this case.
3. See if can qualify for Medicaid. A retired couple living on $36k a year which around half comes from Social Security has NO taxable income. None. I do not know what the specifics are for qualifying for Medicaid in their state but let’s assume it’s 200% of the Federal poverty level. This may seem to be a case where they qualify. Again, I don’t know, but if they do qualify Medicaid would go a long way to reducing their Medicare premium expenses.
If they are able to implement these 3 situations, they’ll have increased their Social Security by around $200 a month and the reverse mortgage will pay roughly $300 a month. That’s their $500 a month right there.
If the Medicaid option works they’ll save another few hundred a month too, meaning they can accomplish their goal of saving $2,000 to take an annual vacation with their grandkids.
Let me wrap this up and tell you why I think God’s work is at play here. We are put on this world to help people. In fact, if you are a Christian, you know the two most important commands Jesus gave us, “Love the Lord with all your heart, soul and mind.” And “Love your neighbor as yourself.”
The financial planning industry really hurts itself when we only work with people who have significant liquid wealth. There is no other service industry I can think of that holds itself in such exclusivity. Yet, who needs us the most? Rich people? Nope. The people who needs us the most are the very people we refuse to serve, like the aforementioned couple! This needs to change and is why I’m grateful to have ‘discovered”‘ the benefits of the reverse mortgage. It is a tool that can help many people in their retirement.
If you have equity in your home, you really should revisit the idea of reverse mortgage.
Now that I have, I will certainly be discussing this with my clients going forward in a way to enhance their retirement planning.
Blessings to you all,