Seniors & Aging

What a great idea(?)

Those reverse mortgage commercials sound like such a good deal.

Well, maybe…

Many financial planners and wealth advisers urge us elders to substitute liquid fixed assets for fixed ones, a sound financial strategy. Liquidity is vital to cover the ever-increasing and underfunded cost of late-life and end-stage living, which, as we’ve lamented frequently, continues to rocket.

A few recent comments:

Rachel Becker in “The Verge” cites a fresh Harvard Medical School study showing that Americans had to pay almost twice as much for prescription drugs in 2013 as those in nineteen other industrialized countries. It’s even worse, now. And it affects seniors the most, of course. The “Journal of the A.M.A”. blames F.D.A. protective regulation and the system of patents.

Consumer fraud, although being attacked, thrives. This summer the “New York Times” reported on a busted Florida Medicaid and Medicare scam network that added over a billion dollars to our taxpayer and premium-payer cost. And “The Motley Fool” exclaimed that for various political and actuarial reasons Social Security will burn through the main income source for 59 percent of us, the OASDI reserves, by 2034, unless Congress either reduces the benefits or increases the wage base and taxes. Either way, it’ll cost us more.

In this newspaper, Brian Blase recently examined the upward pressure that uninsured people whom Obamacare omits exert on Medicaid, also forcing benefits reductions and higher taxes. Medicaid isn’t only for the poor; It’s also for us financially responsible middle-classers when we have used up our assets paying the cost of taking care of ourselves and our elders in our high-standards society through our eight, nine, and even ten decades of life.

Here also, Bloomberg’s Ben Steverman reports that the average 65-year-old can expect to incur $ 130,000.00 in future out-of pocket health care expenses -- And in view of continuing medical cost and life expectancy escalation, that surely will updraft, too. Also, last Spring Gail Marksjarvis explored the reality that four out of five American workers don’t or can’t save enough income to fund retirement, and must rely on the unlikely ability to work until higher ages, depend on the children, or hack it on welfare and Medicaid.

“Senior Living Blog” predicts that the growing trend from institutional long-term care back to at-home living, caused by the institutions’ spiraling operating costs, will accelerate. We’ll have to divert greater amounts of precious assets to modify and equip our homes, as well as cover at-home aide-care, for us or for Mom and Dad. And our and the kids’ long term care insurance premium just rose 25 percent.

So, too, many well-meaning estate plans fail to provide enough of the right kinds of assets to implement them. Liquidity: Cash or near-cash, readily divisible, readily transactable, immediately available. Often the processing of estates is delayed or slowed, plus the fiduciaries’ meters have to keep running, because they lack sufficient liquid assets to cover their obligations. Or, a favorite legatee’s inheritance has to be diverted to cover estate expenses. Or, the family has to chip in a lot of cash to pay the expenses, vainly hoping to be reimbursed eventually. Or, or, or, and or…..!

So, how to create enough liquidity to cover the cost shortfalls that our cash flow can’t handle other than to win the lottery? Reverse mortgage the house?

Home equity is a safe, feel-good backup resource in case it’s needed, but it’s illiquid. It just lies there doing nothing, producing no growth, except for unlikely speculative market appreciation in today’s and the immediate future economy. The only way to be able to use it and keep the house is to borrow against it, incurring interest expense. Then, precious income must be diverted from living expenses to pay interest.

Further, it generates no cash flow (income), either. But $100,000 transferred from it into an annuity can produce $ 8,000.00 to perhaps $ 10,000.00 tax-favored cash flow per year for an annuitant starting in his/her mid-70’s, or three-to-six-percent annual yield in conservative exchange-traded bond funds without diminishing the principal. That’s one reason that so many of us sell our houses and lease condos instead, especially if the value has appreciated over the past many years’ ownership -- if the benefits can be greater than the condo rent.

A downside of doing that, however, is the sacrifice of income tax “stepped up basis”, a tax-code gift to our estate beneficiaries if they inherit the home instead, unless another asset replaces the home.

Conversely, many of us insist on keeping our paid-for houses for various justifiable reasons, especially sentimental ones. For those, converting the equity into liquid usable cash by borrowing, as with a reverse mortgage, sometimes can be advantageous. A few examples:

Borrowing home equity to pay necessary living expenses costs less than other kinds of borrowing do. Interest rates are far lower than rates on other kinds of borrowing, as you know, and interest payments still are income-tax deductible. Mortgage contracts contain fewer fine-print booby-traps and more flexibility options than most other debt instruments do.

Consulting a successful professional investments adviser, you even might be able to create leverage in today’s markets -- achieving a higher rate of net yield on reasonably safe investments than you have to pay in interest for the loan.

Mortgage and home owner equity loans bear lower interest rates than other kinds of loans because the home’s rock-solid equity collateralizes them. Many of us take advantage of that benefit by using the proceeds to pay off higher-interest debt, such as car loans and credit card debt.

In hyping the opiate that you don’t have to make payments on a reverse mortgage “until you leave the home”, the TV commercials subvert the stark reality that the RM, like any other loan, is a debt, incurring compound interest. Unpaid compound interest doesn’t just add to the principal -- It multiplies it!

If you don’t pay at least the interest charge periodically, or the contract doesn’t permit it, it’s added to the principal, and you’ll then be charged interest on higher and higher principal amounts. Compounding becomes a raging conflagration over the long run.

$ 100,000.00 of interest-incurring debt at 4.00% compounding annually grows to $ 121,700.00 over five years, $ 148,000.00 over ten, $ 181,100.00 over fifteen. That’s what you or your heirs will owe.

So, I suggest borrowing only if you must cover necessary expenses, or safely can improve your income and/or debt-service cash flow. But, if you borrow, prevent the conflagration -- Do pay at least the interest regularly.

Before doing anything, do the math and examine the risks and implications that apply to your unique case, advisedly with the guidance of your financial guru, to see whether it makes sense. And have an expert examine the deal to discover any of those fine-print booby traps. For example: Heavy fees for making payments, application and processing charges, expiration dates and lender’s option to foreclose early, and balloon payments.

Yes, I know: We often dialogue about some of these facts of life, and I compliment you for remembering them. And isn’t it good to dust them off, to update them? Besides, maybe you’ll disagree, or be able to add some wisdom to the dialogue. Please do!

Contact Gary Newman at garynewman.clu@gmail.com. Your ideas and comments are always welcome.

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