Some Tips for Bringing Debt into Retirement

Most people approaching retirement age admit they have struggled with thinking ahead not just about life beyond their working years but also about how to make the money they’ve saved last during that time and to plan appropriately for it after they pass away. While a lot of information out there talks specifically about saving or how to maximize what you save, what about debt that you might be bringing into your golden years? Is there a particular way you should handle it? 

Did you know that the typical American couple has approximately $5,000 of retirement savings? However, debts are on the rise: studies show that debts have tripled since 2003 for those in their mid-60s. Many older Americans are picking up additional debt because they are refinancing their homes, adding on two or three decades worth of payments in the process. Others are taking cash out of a reverse mortgage. Sometimes this borrowing is done with the best of intentions, such as helping one of their children with the cost of a divorce, assisting a grandchild with a college education, or trying to enhance income after a job loss. With the downsizing that usually comes as part of this process, it can lead to a higher mortgage on the first house.

Now more than ever older Americans are working longer to try and make ends meet so that they can cover a child’s advanced education. Even those not pursuing further education may be returning home for additional financial support. The refinance process that might seem like a quick fix for cash flow could even double the size of the original mortgage, though.

Reverse mortgages are also picking up traction even with wealthy older individuals. The reverse mortgage seems like a way to enhance current income without having to delve into a retirement portfolio or a current income stream. Reverse mortgages have very specific rules, however, and should not be taken out until you have had the chance to talk over all the pros and cons.

Being aware of all your debts and being mindful of additional support you may need for healthcare needs is critical for anyone bringing debt into retirement. A team of professional advisors, including a financial advisor and your estate planning attorney, may be extremely helpful during this process.



ALERT: New Rules for Reverse Mortgages

As the costs of long-term care continue to rise, more and more elderly Americans are turning to reverse mortgages in order to fund these costs. A reverse mortgage allows a homeowner aged 62 or older to convert his or her home equity into cash while also remaining in the home. The homeowner can choose to accept this cash through a line of credit, monthly payment, or lump sum. As a recent article explains, the rules surrounding reverse mortgages are about to change.

Logo of the Federal Housing Administration.
Logo of the Federal Housing Administration. (Photo credit: Wikipedia)

The Federal Housing Administration (“FHA”), which insures and regulates reverse mortgages, recently announced that it will modify the reverse mortgage program in order to reduce the incidence of default. Two major changes include lower caps on borrowing limits and new rules that will make it even harder to obtain a reverse mortgage.

The FHA plans to change the borrowing limits in order to reduce the cap on the amount that a borrower can receive in the first year of a reverse mortgage. After the new rules are implemented, a borrower will only be able to take up to 60 percent of the appraisal value of the home. This amount is reduced from the previous cap of 75 percent.

The FHA will also implement various rules that will make it harder to obtain a reverse mortgage. These rules will also likely reduce the size of the loan that borrowers will be able to receive. The new rules are scheduled to take effect on October 1.

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