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Retirement Planning > Saving for Retirement

The house doesn't always win

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“Tap into your home equity and retire happy and satisfied!”

Sound familiar? It should. Chances are that some of your advisors are touting reverse mortgages as a panacea to the widening consumer savings gap. But before you leave skid marks on the pavement as you race to offer this advice, let’s look at what the facts suggest. It’s all about suitability.

According to the 2006 Retirement Confidence Survey, 53 percent of all Americans have saved less than $25,000 to fund the second half of their lives. While these numbers are disturbing, Americans have a significant untapped financial asset that can be utilized to achieve financial security — their home. This situation creates an enormously appealing opportunity for finance companies looking to “help” the consumer while they concurrently “help” themselves to large fees.

The argument is appealing: the American dream has always embraced the concept of home ownership. Yet few Americans stop to consider how much of their personal wealth is tied up in their home. A 2004 survey of consumer finances conducted by the U.S. Board of Governors of the Federal Reserve System reveals that 21 percent of the wealth holdings of a typical household are tied up in the primary residence. On average this represents more than $125,000. But with declining real estate values and subprime lending concerns added to the mix, a reverse mortgage, given these dynamics, may not be appropriate for most.

Because the economic markets are volatile, many investors may seek to”cash in” before the market erodes further. Investors should carefully consider their options. It may be better for some to wait out the current real estate mess and instead focus on managing their liquid assets as part of a more stable and balance investment portfolio.

I would argue that reverse mortgages, structured properly, can indeed prove beneficial in helping some seniors meet the some of the extraordinary medical expenses they often incur during retirement.

According to a Center for Retirement Research survey, 75 percent of homeowners between 50 and 65 have no plans to tap their home equity. Nearly 50 percent said they would only use their home equity as a last resort to meet nursing home care or other health emergencies. They are probably the prudent ones.

As an advisor, you work hard to present the pros and cons in detail to clients. Talk honestly and in detail with seniors about home equity as part of financial plan that can successfully sustain them through 30 or more years of retirement. Using a reverse mortgage can allow seniors to gain access to important financial resources, but it can also erase an asset that could significantly appreciate in a market upturn.

As a financial practitioner, seniors are counting on you to help them make educated and informed choices about their long-term financial security. A senior’s home is more to them than just an asset. It is a lifetime of memories and in many cases their single most significant financial asset. When it comes time to discuss reverse mortgages, make sure you fully explain the risks along with the possible rewards. Make it your personal mission to treat every older client the way you would want your own mom and dad to be treated.

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