Sunday, January 29, 2017

Estate Planning: Taking Debt into Retirement

FROM http://www.columbusceo.com/

Debt can be a strategy, too.

The average American couple has retirement savings of only $5,000. Surprisingly, the flip side of their balance sheet doesn't look much better, with debts nearly tripling since 2003 for those in their mid-60s.


Older Americans aren't burning the mortgage at the retirement party. Instead, they're refinancing it, adding on 20 or 30 years of payments or drawing out cash through a reverse mortgage.

They may be borrowing to pay for a child's education, to manage the expense of divorce or the loss of a spouse, or to make ends meet after a late-career job loss. Downsizing means less space but often leads to a higher mortgage than on the original family home.

"What we see is people working longer to pay for their children's advanced education," says Todd Walter, client advisor and director of advisory services for The Joseph Group, a Columbus wealth management firm. "Their son wants to go to medical school, or even if it's not for their education, it's supporting children later on in life-whatever the kids want to do. These are people making a sizeable income, adding on a couple years of work, usually in leadership positions or management."

Unfortunately, Walter says, some older couples are repeatedly refinancing their homes, adding up to 30 years to the payoff clock and taking out extra cash. "Instead of a $100,000 mortgage, they have a $200,000 mortgage," he says.

Illness is another concern, says Patty Callahan, an information and assistance specialist at the Central Ohio Area Agency on Aging. "The health issue tends to be a big one, because that can sometimes impact two incomes in a household, the person who is injured or ill and ... sometimes the loss of income from the person serving as that person's caregiver, pulled out of employment."

Despite those concerns, a growing chorus of investment advisors to the AARP says debt is not the enemy. Instead, it has become a strategy for mature borrowers at a time of low interest rates, high home values and a relatively favorable stock market, even if they are at risk from future rate hikes.

Reverse mortgages, once a strategy for low-income elderly, are now gaining traction with high-wealth clients as a way to bolster current income without tapping into long-term savings or investment and retirement portfolios. And it's a big market.


"About 10,000 people a day are newly eligible for reverse mortgages" as they hit age 62, explains David Weinstein, national business development manager for the reverse mortgage division of Concord Mortgage Group in Westerville. "There is about $6 trillion in equity in the 62-and-over demographic."

The online Reverse Mortgage Daily reports there are $55 billion in reverse mortgage-backed securities. In October, reverse mortgage lenders issued $832 million of Home Equity Conversion Mortgage-backed securities.

In 2013 default rates on reverse mortgages peaked at 10 percent, draining the FHA Mutual Mortgage Insurance Fund, which is still $7.7 billion in deficit due to reverse mortgages. Reverse mortgage defaults prompted HUD to propose several batches of new regulations to limit immediate withdrawals and bolster credit quality.

Although reverse mortgage defaults have eased somewhat, nobody can predict exactly where that market will lead, let alone what the overall wave of debt will mean for older Americans, but there's no escaping its tsunami-like growth curve. Many moderate investment experts, sensing the difficult risk/reward equation, are taking a careful look.

"We're saying you want to be debt-free, pay off the loan and let the markets take care of themselves. That's how I'm counseling clients generally," says Walter of the Joseph Group. "Some clients are more debt-averse and saying at 60 years old, with the kids out of the house, 'I'm using all my surplus to pay off the (debt).' They may even tie their retirement to the date, roughly, when the mortgage is going to be paid off."

"Borrowing wisely is every bit as important to your financial success as investing astutely. Taking the time to structure your liabilities with the same care you place in structuring your investments can ensure a balanced approach to achieving your financial goals," says Kathleen E. Lach, senior vice president-wealth management for the Columbus office of UBS Financial Services Inc.

Other observers see baby boomers, most of them retired or moving into retirement age, taking on more than their fair share of liabilities-and risk-as they reach their golden years.


Between 2003 and 2015, aggregate debt for 65-year-olds has climbed 170 percent, and 65 percent of that growth appears to have come as boomers are hitting their 60s, according to census and Equifax data analyzed by Liberty Street Economics in a report called "The Graying of American Debt."

What's really happening is that individuals are making decisions to borrow more often, and for larger amounts. For example, those 65 and older owing money on their homes climbed from 22 percent to 30 percent from 2001 to 2011, the most recent census data shows.

In 2014, the Consumer Finance Protection Bureau says mortgages constituted 32 percent of their complaints from those 65 and over, while reverse mortgages were only 2 percent.

Despite the debt patterns, AARP-Ohio cites the early 2016 EBRI Retirement Confidence Survey, which concludes most Americans don't describe their debt as a major problem. The study says just 15 percent of workers and 8 percent of retirees believe their level of debt is a major problem, and 67 percent of retirees claim they do not have a debt problem at all.

Rather than pay off the mortgage and pay off all the credit cards, older Americans-even in high-wealth situations-are letting debts ride. Some want to sustain travel and affluent lifestyles; others borrow to preserve liquidity while they keep savings, investments and retirement accounts intact.

For most older people, though, AARP Ohio wants to emphasize savings and the need for reforms to bolster Social Security, cautioning that "increasing amounts of debt can threaten long-term financial security," especially when unforeseen illness, job loss or death of a spouse add to the burden.

"Debt does seem to be less of an issue or concern than before the recession," says Barbara Sykes, Ohio director for AARP. "But what we find is a significant number of individuals do not have retirement savings. They're not choosing to save."


That choice between borrowing, spending or saving looks more complex right now, and it takes great care to make the right call.

"Given the current interest rate environment, which in most cases still remains near historic lows, it is a good idea to review your overall debts (or liabilities) at least once a year," says Lach of UBS. "Some debts may be consolidated, some paid off and some refinanced. However, just because you can refinance or pay off debts doesn't mean you should. As a general rule of thumb, your monthly debt payments should be less than 40 percent of your monthly income."

Keeping debt under control-and in proper perspective-at retirement could be one of the most beneficial resolutions of all.