Counting on Working Past 65 is Statistically, Being Overconfident
Look, it’s just a fact… you might be able to work until you’re 99. I don’t know if you will and neither does anyone else. But it’s also a fact that it might not work out that way, and counting on being able to work indefinitely is not a retirement plan… it’s a bet on an older person who only gets older each day.
Financial advisors almost universally tell their clients the many advantages of working longer if you can. But, how long will you be just fine going to work as usual? You need to consider that, after 65, it could be a much shorter time than you’d like it to be… or planned for it to be… or in other words, things may not run according to plan or turn out the way you’d hoped.
That’s because according to USA Today and a recent Greenwald & Associates/Employee Benefit Research Institute study, “50 percent of Americans who plan on working longer find themselves retiring unexpectedly.”
As to the reasons given for the unplanned retirements… 60 percent cited health problems… 27 percent credited changes at their company… 22 percent said it was having to care for a family member… and 10 percent answered, “new skills required for their job.”
The simple fact of life is that we don’t know how it’s going to go as we get older. And yet, I can’t count the number of people I know who are planning to work past 65 as their answer to surviving retirement. I really don’t think they truly understand on precisely what they are so fervently banking.
The study above found that 36 percent of Americans are planning to work past 65 years of age, but also that a full 60 percent of respondents said that they were either “not at all confident,” or only somewhat confident that they’ll have enough money to make it through retirement comfortably.
Only 22 percent said they were “very confident,” and this study proves that as a group, they’re being overconfident.
Ask any average or above average retired person and they’ll tell you… it’s impossible to be truly prepared for decades of retirement. Anyone can run out of money before their life expectancy… anyone can outlive their nest egg. It just depends on how things go. And it’s truly very much a crap shoot.
Chances are that at some point during your retirement years, you’re going to find that your monthly or other income has unexpectedly gone down… and/or that your monthly or other expenses have unexpectedly risen. It’s often the sort of event that you don’t get much if any notice about… it just happens for some unexpected reason and it’s over before you can do anything about it.
How you’re able to handle the unexpected during retirement is everything. It’s not what you see coming that’s dangerous… you can prepare for something you see coming. It’s what you can’t see coming that can cause the most harm when it strikes, because it happens by definition when you’re underprepared.
It goes without saying that you want to participate in some type of retirement plan(s)… that you should carry appropriate amounts of insurance… some say disability coverage is a must, others are big fans of Long-term Care policies. Have a formal plan… save more. Blah, blah, blah… I’m not here to talk about those sorts of things. I want to talk about something much more important. I want to talk about your home and how you handle it during retirement.
First of all, many retirees would tell you that you cannot safely retire as long as you have a mortgage payment. Monthly mortgage payments require monthly income and retirement means you stop working… you stop getting a regular paycheck from work.
Oh sure, as long as you can continue working, you’re very likely to be just fine with a monthly mortgage payment, but when you stop… or when you’re forced to stop for whatever the reason… what then?
You don’t want to spend down whatever you’ve saved… at least not until you’re closer in age to your life expectancy. If you need money, you won’t be able to get a HELOC today… there are stringent income requirements, and you won’t be working and getting a paycheck, remember?
So, now what? What will you do should your situation change significantly during retirement?
Every week, I talk to people in their 60s, 70s, and beyond, who have been hit with some life event that changed their financial picture permanently. In far too many cases, their trials ended with foreclosure and the auction of their homes. None of them ever saw it coming, whatever it was that hit their home and their lives. None can ever believe that what’s happening is happening to them.
Plan for the unexpected by keeping your cash…
Here’s a case study based on a couple’s real life experience, downsizing into a home in a much less expensive area of the state. After the sale of their home in Southern California, they were ready to move to a home in the northern part of the state… they found a place they both loved… for $600,000.
The proceeds from the sale of their home left them with $850,000, so they had the money to pay the $600,000 in cash, which would satisfy the “no mortgage payments in retirement” ideal. But it would also only leave them with $250,000 in cash… having $500,000 from the sale would feel so much better.
They try to find a place for less money, but they actually don’t need to… because they can use a HECM-for-Purchase type of loan to finance 50 percent of the home’s price with a loan that requires no monthly payments for your entire life in the home. You can make monthly or quarterly or even annual payments if you want to, but you don’t have to… it’s up to you.
With HECM-for-Purchase home financing, the couple was able to keep more than $500,000 in the bank even though they’d purchased a $500,000 home, because they only had to put $225,000 down, based on their age and other basic qualifications, and the HECM picked up the rest. The interest rate was around 4 to 4.5 percent and there’s no monthly payment required, although you can also make one at any time and in any amount.
And since there’s no payment required, if something does cause your income to drop or expenses to rise unexpectedly, you can’t lose your home to foreclosure, or be forced to sell it because you can’t afford the monthly payment. As long as you pay your property taxes, insurance and regular maintenance, you can stay in your home until the end without ever having had to make a monthly payment. Or you can sell it at any time… with a HECM… it’s your home, you own it, just like with a traditional mortgage.
How can that not be infinitely better than any other alternative? And I do mean, “infinitely better.”
The problem is becoming my mission in life, to make sure people understand how HECM reverse mortgages work, so they understand the option, the pros and cons of every aspect, and therefore can make a truly informed decision. Always, the best kind.
The point of the HECM-for-Purchase is that you hold onto your cash instead of essentially burying it in your backyard where it’s almost impossible to get at should you need to access some of it. It’s just a mortgage, like any other mortgage… the big difference being that you’re not required to make monthly mortgage payments. And when you don’t, the interest is simply added to your loan balance to be repaid when you sell the home, move out or die.
Or, you can choose to make interest only payments…. or payments of principal and interest… fully amortized payments, if that’s what you want to do. But, if something happens and you don’t want to make the monthly payment that you’d been making, you could simply stop and no one would even call… and then start again whenever ready without having to call anyone to tell them anything about your plans.
If you make the interest only payments, your balance will remain essentially the same, but remember, you’re house also should go up at least a little each year, so that appreciation will offset some of the interest accruing on the loan. If your interest rate is four precent, for example, and your home goes up in value by four percent a year, then your interest is being offset by the rate of appreciation and your equity position will remain unchanged overall.
The point is that you’re in control… control of your cash, control of your payment obligations, and much better control of your retirement… instead of retirement ending up controlling you. Even if plans don’t work out, with a HECM-for-Purchase home financing you only have to pay your property taxes, insurance and normal maintenance… and you can remain in your home without having to make a payment until you sell it, move out or die.
Using this method of financing is also much easier to qualify for… there are no credit score requirements and no strict income requirements like there are with all conventional loans today. Other than that, it’s just a regular mortgage in every way… just like the one you’ve had for years and may still have today.
What are the negatives?
I’m honestly not sure there are any, but if anyone thinks there are some, I’d sure be interested in hearing what they are. I just can’t come up with a rationale that says that sinking 100 percent of a home’s value into a home is a good idea during retirement. I suppose if you have so much money that you could never spend it all during your lifetime then it wouldn’t matter… but that’s pretty rare.
Some people say that the negative is that the interest on a HECM-for-Purchase reverse mortgage compounds and therefore erodes the equity over time, but if that’s the concern, then make interest only payments and the problem is solved.
Having a HECM-for-Purchase reverse mortgage doesn’t mean you have to make no payments on the loan, it only means that whether you do or not is entirely up to you. You can even make fully amortized payments every month if you want to… just like you would on a traditional mortgage. Or perhaps you want to just make one payment a year… again, it’s all up to you.
By using a HECM-for-Purchase to finance your home during retirement, you simply give yourself more options and hold on to more of your money for who knows what will happen as you get older… that’s it and that’s all.
Others will say that the HECM reverse mortgage is “expensive,” but I just don’t see that as valid objection either. I suppose anything CAN be seen as expensive, but the HECM is really not any more expensive than any other loan, and it might even be less expensive, depending on how you look at it.
The point is… don’t eliminate the possibility… compare it. If the HECM makes sense then there are some major advantages to using it during your retirement years. If it doesn’t, then don’t do it. But, know the facts… compare the numbers. It’s much too important an issue to ignore, and you certainly don’t want to eliminate it based on not fully understanding it.
I talk to people every week that don’t know enough about the HECM reverse mortgage and how it can be used to their advantage during retirement, and it’s tragic how many simply don’t know the facts and as a result are making decisions that are not in their own best interest.
And what’s even more amazing is how few Realtors know enough about the HECM for Purchase to market it to their prospects and clients.