Where will Americans Find Money for Retirement?
“More than half of all Americans over 55 have no retirement savings at all.” according to the June 7, 2015, article in the Guardian. Either we all are in denial or it is impossible to save for retirement. If either is true, where will Americans get money for a secure place to live and the necessities of life when they stop working?
How about 401K’s and IRS’s?
Survey after survey has shown how Americans fail miserably at retirement planning. The average 401K plan balance hit an all-time record of $91,800 in the first quarter of this year, and some long-time savers had balances of as much as $251,600, according to calculations by Fidelity, which manages the single largest chunk of the country’s retirement plan assets.
You Need 12 Times Your Income for Retirement
That 401K balance sounds impressive, right? Until you realize that most financial advisers recommend that you have 12 times your annual income socked away at the time you retire if you want to maintain your lifestyle. So a savings of $91,800 would give you an income of only $7,500 for the whole year, and the super-saver, with a balance of $251,600, would have only $21,000 a year or only $1,750 each month. By this “12 times” standard, you would need $720,000 to expect about $60,000 per year. However, in reality it may be more like one million because the financial markets have not been faring very well lately.
Situation is Getting Worse, Not Better
“We are going to see worse numbers in the future,” says Bailey Childers, executive director of the National Public Pension Coalition in Washington DCThe problem, she argues, is that even for those who have them, “401(k) plans have not worked.”
Is our Retirement Plan to Keep Working?
Under-prepared baby boomers on the verge of retirement, too, are blind to certain uncomfortable truths. A report on the economic wellbeing of US households by the Board of Governors of the Federal Reserve System, published last month, revealed that 26% of those surveyed declared their retirement “plan” was to simply keep working; 12% didn’t plan to ever stop working; another 45% who did plan to retire intended to work to some extent to fill the financial gaps between their savings and their financial needs. In other words, only 17% didn’t plan to work after retiring. Unsurprisingly, the lower their savings totals, the more likely they were to say that they intended to keep working – clearly assuming that they’ll stay in good health into their 90s, and that the jobs will remain available.
A Ray of Hope for Homeowners
For a lot of Americans there is no good or easy answer to the problem of having a secure place to live and money for necessities as they age. However, for homeowners there may be help. Those who bought a home and made payments reducing their mortgage, that along with the increase in real estate value, has built the equity in their home as their asset. They may have some small pension or retirement account, and there is a little income from Social Security, so there would be some monthly money coming in, but not enough.
How Can You Use the Equity in Your Home?
There are three ways to realize the equity you have built in your home. They each have advantages and disadvantages.
You Could Sell You Home
The first thing that comes to mind is to sell your home and get the cash. One advantage is that you get to move. And one disadvantage is that you have to move. An advantage is maybe downsize and move to a community with a lower cost of living. The disadvantage may be moving to an area with less medical services, less cultural and entertainment opportunities, and you have to get rid of a lot of your stuff. Your money may be less than you expect du to realtor fees and capital gains tax, etc. If you decide to rent and you live long enough, you will eventually run out of money. Then you are left with no assets at all.
Some folks try to borrow against their home with a line of credit from a bank or a traditional home mortgage. The first problem is qualifying. Even with a great credit score, the bank requires you to show income enough for the loan. Most folks 62 and over are u able to qualify. But, even if you qualify, the monthly payment just makes your situation worse. Often people are using the money they borrowed to pay for the loan. That’s a real house of cards. It will collapse.
Use a Reverse Mortgage, or Home Equity Conversion Mortgage
Simply put, a reverse mortgage will allow you to tap into some of the equity of your home without the burden of a monthly mortgage payment. All you have to do is pay the taxes, insurance, and keep the home livable, as you would have to do with any mortgage or even if you didn’t have a mortgage. The disadvantage is that the loan reduces your home’s equity as you use it. The interest for the money you have used from the loan is merely added to the loan each month. That’s why you don’t have a monthly payment. The corresponding advantage is that you will be assured to have a home for the rest of your life and the use of the money from the reverse mortgage.
There’s the advantage that you don’t have to move, or get rid of your stuff. Another advantage is that you have the same medical services and cultural opportunities that you have always had. Also you have your same friends, clubs, and organizations.
Building Cash for Later in Retirement
By obtaining a reverse mortgage and leaving the money available to you in the line of credit, not taking it out up front, you will build access to even more cash for use later in retirement. The line of credit has a mandated growth factor. The lender must increase the amount you have access to by the interest rate of the loan and an additional 1.25%. That amount is compounded monthly. For example if you qualified for $300,000 and the loan interest was 3%, the growth rate would be 4.25%. Getting the reverse mortgage in your 60’s and not needing the money until you are in your late 70’s or 80’s will allow that money to grow considerably. And it is not dependent on your home value. Even if there was a significant downturn in home values, you would still have access to the full $300,000 plus the amount of mandatory growth. This money could be used for home modifications, in-home care, medical expenses, or anything you want.
The Problem Will Continue for a Lot of Americans
This lack of retirement savings problem will continue. There will be a lot of Americans who will need to keep working as they get older, taking up jobs that would normally go to younger people. Homelessness will increase. There will be more burdens on the taxpayers for increased Medicaid and Medi-Cal funding as more people are unable to pay for the care they need. We as a population should be read for this and be planning on ways to help the situation. I don’t have the answers for the larger problems, but I do know what will work for the homeowners with equity in their homes. I do know how to insure that they have a comfortable, sustainable place to live for the rest of their lives. I can help them with the government insurred Home Equity Conversion Mortgage, we commonly call the reverse mortgage.
Get all the Facts
There is a lot more to know about reverse mortgages beforw you would get one, Learn all the facts about reverse mortgages at my website, charlesguinn.com, and see my easy to understand videos my YouTube Channel
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