HECM Product. Product vs. Process. Written by a financial planner with nothing to gain from Reverse Mortgages.
By Stephen Kelley, CSA
I have said it several times and written it in dozens of places, including books, columns, radio scripts (such as they are) and workshops: A good financial plan must be both financially and emotionally sound. I can create the most financially secure plan the world has ever seen, but unless it makes you feel emotionally secure it’s worthless.
There are many factors that cause people to worry about their money. These can be the vast unknowns, the conflicting advice people get from others who have a stake in their money, fear of losing money, fear of missing opportunities, and not knowing how to start. In my mind, these factors are in one way or another about the same thing, losing control. When we are working and have regular income, we can be more sanguine about things like market volatility. However, once we have gotten into that convertible with Thelma and Louise and driven over that ledge, it’s much more difficult. Everything that happens can have a significant, and in many cases damaging, impact on our livelihoods.
Our goal is to not only provide better outcomes for people as far as lifestyle and cash flow are concerned, but to also provide better quality of life. Fortunately, the tools we use and the philosophy behind our planning process fit this objective very nicely.
Job one in any planning process is to determine what a client really wants out of life.
Far too often, people spend all their time thinking about products and strategies, rather than process and outcomes. I believe this is a sure road to failure.
You see it in our media all the time. Many of the financial “gurus” on TV or radio get stuck in this trap. You might have heard one on TV saying, “we will never sell an annuity,” or another claiming permanent life insurance is the worst product ever sold, or another opining about avoiding reverse mortgages at all costs. My question is why? They would say because they are “bad products.” I would say they are just products that are frequently misused because they are misunderstood.
Here’s an example that just happened today, right before I sat down to write this. A man who has had some tough luck in his life came in to try and figure out how to make the best out of a very tough situation. He has a house worth around $225,000 on which he owes $80,000. In addition, he has a rental unit that brings in about $600 a month, and a Social Security benefit of $1,550 per month at full retirement age. He works in a manual job making around $16 per hour, is 64, and didn’t know what to do.
His need is about $2,000 a month. I recommended he work as long as he can and delay Social Security until at least full retirement age. If he can get to 70, that would be $2,100 a month. It turns out he has another 17 years to go on his $80,000 mortgage with a payment of $550 per month. I asked what his goal for the house was, and after he told me it was to be there for the duration, I recommended he consider a reverse mortgage.
The result of these moves would be an extra $550 per month in his pocket from paying off his house, plus about $33,000 in cash from the reverse mortgage. The delay in Social Security benefits brings that to over $2,000 a month. His final numbers would be $1,500 per month in expenses, with $2,100 a month in Social Security plus any rent he gets from his unit, which is now about $600 per month.
Of course, we then had the conversations about delaying his Social Security payouts and the desirability of the reverse mortgage. He mentioned a friend had urged him to start receiving Social Security right away, or else he could “lose” his benefits. His friend was also quick to point out how “bad” reverse mortgages are, and how he should avoid them at all costs.
Let’s look at each. First, what’s the real benefit Social Security provides? Is it about the money you can collect early, when you are working, just to make sure you get what’s coming to you? Or is it about establishing a lifelong income plan that will make you financially and emotionally secure for life? I would say it’s very much the latter. As for the reverse mortgage, his objection was, “but when I sell it there won’t be any money left.”
My response, so what? He has no kids and is never married. He wants to live in the house until he can’t any more. And while he’s living, his number one issue is cash flow. These needs are supported by the reverse mortgage, in fact, all of these are exactly what they were designed for.
When you hear the noise about various product being good or bad, pause for a moment. Ask yourself what outcome you are looking for. If the product being suggested support that outcome, and that outcome really is what you want, go for it. After learning everything you can about it, of course.
Stephen Kelley can be heard, along with his co-host Mark Perkins, on the Free-to-Retire Radio Hour on Saturday at 7 a.m. on 610 WGIR and Sunday at 12 p.m. on 980 WCAP. Steve conducts workshops on Maximizing Social Security and The Other 60% – More Now, More Later. He is the author of several books, his latest ones being “Ready-Set-Retire” and “Tell Me When You’re Going to Die and I’ll Show You How Well You Can Afford to Live.” His financial planning practice, Safety First Financial Planners is located at 33 Main St. in Nashua. He can be reached at 603-881-8811.
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