Posted on 05 May 2010
By Mark Miller
Q: I was downsized in September, 2009 and decided to retire, since I’ll turn 68 this year. In a recent column, you made mention of the old rule–that people need to have 80 percent of their pre-retirement income to make ends meet in retirement. I used 70 percent of net income; I felt this was a better method, taken into account a change in lifestyle.
After reviewing our changes in lifestyle, our monthly income will just meet our monthly needs. But in order for us to stay in our home–near family–we’ll have to use a reverse mortgage. This will be used to pay off the 10 years left on a 4 percent mortgage of $112,000 ($1,100 monthly), allowing us to have approximately $80,000 to $100,000 in cash. Add this to savings of $70,000 for approximately $170,000 to $180,000 in cash for us to invest in a safe product returning 3 to 5 percent. By doing this transaction, we’ll be able to live comfortably. Your thoughts? – C.F., via the Internet
A: Reverse mortgages are not my favorite solution for meeting retirement needs. They’re expensive products, with big upfront premiums and origination fees. But if you’re house-rich and cash poor, it’s not an unreasonable path to pursue.
A reverse mortgage is an interest-bearing loan secured by the equity in your home. If you’re over age 62, you can use a reverse mortgage to convert a portion of your home equity into cash and continue living in the house.
The reverse-mortgage business has been growing quickly over the last several years, despite high fees and a history of abusive sales practices by some lenders.
It can be a useful tool if you need to free up equity for a large expense or a medical need such as long-term care or if you face the threat of losing your home altogether because you can’t make mortgage payments. But a reverse mortgage should be viewed as a last resort used for necessities, not for dream trips or other luxuries.
Most important, approach reverse mortgages with a great deal of caution. Make sure you understand how the loan works and what you’re getting into. Steer clear of any lender selling bundles of financial products alongside the loan. One abusive practice used by some lenders involves using proceeds from a reverse mortgage to fund an annuity; generally, that’s a scam because the annuity proceeds usually fall short of the loan costs.
Reverse mortgages offer a way to spend down the equity you’ve built in your home. But unlike a traditional mortgage or home-equity line, you don’t have to make payments on the loan until the home is no longer used as a principal residence-typically when you die or move into a nursing home. At that point, the principal and interest accrued on the loan are due in full. (The amount owed can’t exceed the value of your home; if your home is sold and the proceeds exceed the amount owed on the mortgage, the excess funds go to you or your estate.)
Another benefit: Reverse mortgages have a “nonrecourse” feature, which means the amount owed can’t exceed the appraised value of the home. If the value falls below the loan amount, then the lender is on the hook for the difference.
The most typical loan type is a home-equity conversion mortgage (HECM), which is insured by the Federal Housing Administration. Reforms contained in the Housing and Economic Recovery Act of 2008 made it easier to use HECMs by raising the loan limit to $417,000 nationally and to $625,500 in areas of the country where housing values are relatively high. The new law also capped loan-origination fees at 2 percent of the fi rst $200,000 borrowed and 1 percent for any amount beyond that. Overall, origination fees can’t exceed $6,000.
Federal law requires that borrowers receive a free counseling session with a loan counselor approved by the U.S. Department of Housing and Urban Development-usually at a not-for-profit organization or public agency. Make sure you find a counselor who is knowledgeable and independent; the Financial Industry Regulatory Authority recommends asking any counselor suggested by a lender whether he receives any funding from either the lender or the mortgage industry. Even if you are applying for a loan that is not federally guaranteed, it is a good idea to get advice from a trusted financial adviser who has no interest in either the the mortgage or any investment you plan to make with the proceeds.
A final note: I’m curious to know where you will find a “safe product” returning 5 percent. With interest rates on 12-month CDs hovering just over 1 percent, it sounds like you’re talking about the stock market–and that’s no place to have all you money stashed at age 68.
Q: I’m a 74-year-old senior who retired at the end of 2008. The Social Security Administration says I have to pay $287.30 a month for Medicare even though my 2009 and 2010 earnings are below $170,000. My earnings for 2008 were above $320,000. Can this be appealed? – H.J., via the Internet
A: Medicare Part B premiums are set on a sliding scale according to income. And yes, you have the right to request an appeal. You’ll need to download a Request for Reconsideration form (SSA-561-U2), or call 1-800-772-1213.
However, if your income has fallen due to certain specific circumstances or you’ve filed an amended tax return, you can ask for a new decision without filing an appeal. Download Social Security Publication No. 05-10161.
Q: I am 63, and elected to start taking Social Security last year. I’m taking a temporary job with the Census Bureau, and expect my earned income this year will exceed (the limit on earned income) of $14,160 by about $2,000. This would ordinarily reduce my Social Security benefit by approximately $1,120. Can I avoid this reduction by making a contribution to my IRA of the amount over the limit? – L.S., via the Internet
A: Unfortunately, no. When you elect to take Social Security benefits before your full retirement age, some of your benefits will be withheld if your earnings exceed the limits set by Social Security law; $1 is deducted from your benefit payments for every $2 you earn above the annual limit (currently, $14,160). If it’s any consolation, your lifetime benefits are not reduced, because the withheld benefits are added to your benefits after you reach full retirement age.
Q: I recently lost my husband at the age of 37. We have three children. My husband was very successful and I’m just wondering what is the maximum Social Security amount a family can receive? They took my husband’s lowest salary from 1999 to calculate our benefits and I’m wondering if I should appeal or if we’re already getting the maximum. I would appreciate any guidance. – K.C., via the Internet
A: I’m very sorry for your loss. The amount that your family can get from Social Security depends on your husband’s average lifetime earnings. “Assuming he paid into the Social Security system, the higher his earnings were over his lifetime, the higher your family’s benefits will tend to be,” according to Paul Gada, personal financial planning director for the Allsup Disability Life Planning Center.
“Each year, your husband should have received annual Social Security Statements showing his earnings history and an estimate of the retirement, disability and survivors benefits he and your family could receive based on those earnings,” says Gada. “Take a look at the most recent one; especially the page entitled ‘Your Estimated Benefits’ and the section ‘Survivors.’ Please note that your total family benefits are capped per month as indicated on the statement. If you work while receiving survivor benefits as a spouse and you are under full retirement age, your benefits may be reduced if your earnings exceed certain limits.”
More information on survivor benefits can be found in Social Security Administration publication No. 05-10084 . For information on the appeals process, take a look at SSA Publication No. 05-10075.