As the last couple days of 2018 approach, one thing is certain about the stock market….
It’s VERY moody!!
Ok, maybe “moody” isn’t the correct term to use, but it’s definitely not very consistent. As of today, the stock market is down over 6% for the year.
That spells trouble for a lot of people that rely on the “long term” averages of the stock market for their retirement plans. One segment that it especially hurts are potential reverse mortgage clients and anyone within years of officially hanging up the work boots.
When clients come to me researching reverse mortgages, I normally hear them say things like:
“This is really a last resort for me”
or
“I’m going to use my cash assets first, then do a reverse mortgage”
or
“I’m going to live off the gains I’m getting from my investments”
There are lots of problems with all these ways of thinking. It’s very difficult for me to keep anything brief, but I’ll try me best not to ramble on.
Easier said than done. 🙂
Here we go….
#1 – Using the reverse mortgage as a last resort means waiting until it’s ABSOLUTELY necessary to do something. Waiting until your back is against the wall is NEVER a good time to make decisions, and I’m not just talking about the reverse mortgage here. When you’re under extreme pressure to make a decision, you normally begin to think with more of an emotional mind as opposed to a logical mind. Decisions based solely on emotions almost never end well.
#2 – Whoever started the idea of liquidating cash assets before using the reverse mortgage should not be giving financial advice. It makes no sense to draw from assets that may carry early withdrawal fees and/or be susceptible to income taxes, when the reverse mortgage provides tax free equity from a borrowers home. Once someone liquidates their cash, they have nothing left to benefit from any type of increase in the market (which has absolutely no guarantee to even happen). Even if the stock market rebounds and gains 20%; 20% of $0 is $0.
#3 – Living off the interest that you’re earning on your investments would be AWESOME…..If you earned enough interest on your investments to live off of. I know, I just said the same thing forwards and backwards. It’s kinda, sorta like a palindrome…isn’t it???
This is the point where you start to think to yourself…
“Eric is pretty smart for a U.S. Marine”
I would have to agree with you.
Sorry, I’ll get back to my point.
In a perfect world, the interest earned on investments would be enough that the actual “principle balance” of your money would never go down. You collect the interest, and your asset loses no value.
The problem is we don’t live in a perfect world, and with huge swings in the stock market, the draw down on your assets can quickly exceed the 4% most financial professionals recommend.
ALRIGHT ALRIGHT!! Here’s the take away, and the purpose for my post….
A reverse mortgage gives borrowers the ability to NOT touch their cash assets, by instead using the equity in their home that’s normally not accessible unless they sell.
When the stock market is raging, don’t access the reverse mortgage funds and instead live off the asset gains.
When the stock market is tanking, don’t access the assets and instead use the reverse mortgage funds.
Using this method gives borrowers flexibility to shift between the two very easily. Now, I have to preface all of this by saying everyone’s scenario is very different and this is not a “one size fits all”. What I’ve found normally works best is when we all work together to develop a plan (me, you, your financial adviser, your CPA, your neighbor, etc.). By everyone putting their heads together, you can rest easy knowing you’ve looked at every angle and considered every option available.