An Open Letter To Trusted Advisors

AN OPEN LETTER TO TRUSTED ADVISORS, FINANCIAL PLANNERS, CPAs, ATTORNEYS, LIFE AGENTS, ELDER LAW ATTORNEYS

'Trusted advisors who are charged with the responsibility of helping senior clients make informed financial decisions must, in my opinion, become better informed on the role that reverse mortgages play in senior financial planning.

Well informed senior advisors need to address questions such as:

• What are reverse mortgages?
• How do they fit into a client’s retirement financial situation?
• What are the nuances among reverse mortgage products?
• What, for example, are the costs and benefits of using a reverse mortgage to buy a retirement home versus paying 100% cash?
• On a value and costs basis, how do reverse mortgages compare with alternative home equity loans?
• Based on a client’s life planning needs, when is the best time to begin tapping home equity via a reverse mortgage?
• What is the value of reverse mortgage’s tax-free cash flow in comparison to other cash flow sources?
• How do reverse mortgages interact with public health care benefits?
• How are reverse mortgages redefining our notion of real estate inheritance?
• What are the estate planning implications of reverse mortgage debt?

Addressing these questions could help retirement and financial counselors better serve their clients.  What was once solid retirement and finance advise, when real estate and traditional mortgages are involved, must be re-evaluated as reverse mortgages evolve into pillars of modern retirement financial planning.

Some big name finance and investment columnists along with radio financial gurus, very frequently offer housing financial advise as though reverse mortgage have not yet been invented.  Those who accept the importance of reverse mortgages often discount them as viable retirement finance strategies.  I, however, believe that reverse mortgages have altered retirement finance advise forever.  Those who offer retirement finance advice must bring themselves current with reverse mortgage retirement finance strategies. 

A recent case involved advice which a nationally syndicated financial columnist gave to a couple late in 2007.  Let’s look at the information presented:

On the strength of more than $500,000 in assets, the couple intends to retire in 2008 (this year) to a smaller home in a small community on a budget of $40,000 a year.  They plan to spend $150,000 for a new smaller home.  In the couple’s narrative, there was no indication that they are selling their current home, but I assume this was the case.  It also assumes that the cash from the sale of their present, larger home is included in their $500,000 in assets.  Here is the question the couple posed, “When we purchase a house in the new community, should we use part of our investments to purchase a home free of a mortgage or would this deplete too much of our assets for providing income during our retirement?

Before giving his advice, the financial guru rightly asked the couple to consider whether investing their money (cash price of the new home) will yield them a higher rate of return than the interest cost on the mortgage.  With mortgage rates near 6% at the time, the financial expert counseled the couple in the following way.  “In order to get that rate of return on investments, you will need to take a fair amount of risk.  You will need a portfolio with a healthy helping of stocks.  Remember that in your pursuit of a high investment return, you can fall short if the markets have a prolonged slump.  At your station in life, I would guess you do not want to take great investment risk, so consider paying cash for your home and not take out a mortgage.  Although this will deplete your assets, the lost investment income will be more than offset by the loss of a monthly mortgage payment.”

This would have been great advise if reverse mortgages did not exist.  However, since they do, his advice is flawed.  An informed reverse mortgage advisor could have shown the couple how they could:

• Use tax-free reverse mortgage cash as a down payment on their new home.
• Borrow only a portion of their new home’s price (probably near 60%) and not have a monthly mortgage payment.
• Save on income tax and asset liquidation costs.
• Increase potential investment income by not liquidating retirement assets.

As a knowledgeable reverse mortgage professional, I can add value to a financial planner, CPA, elder law attorney, or any other elder-focused trusted advisor by supplying the often missing information on reverse mortgages.  One more reason why working with a knowledgeable reverse mortgage specialist is a wise decision.'