The Center for Retirement Research‘s Anthony Webb, at Boston College, has issued a new 7-page brief on ways Baby Boomers can make their retirement savings last a lifetime. The brief does not contain any new ideas, but it does a good job describing and comparing existing ideas. Financial planners, aging professionals and certain Baby Boomers will enjoy the paper, but it is too technical for the average reader.

Nest egg strategies described:

1. Spend the Income, Conserve the Capital
2. Spend Down Over One’s Life Expectancy
3. Spend a Fixed Percent Each Year

Webb makes a case for annuities:

Although households may in theory do better by delaying the purchase of an annuity, there is a strong case for annuitizing sufficient wealth immediately on retirement to at least secure the household’s required minimum standard of living, given the likelihood and consequences of error. The question then arises – what type of annuity?

Download the brief here:

“Making Your Nest Egg Last A Lifetime”

Any approach to retirement planning has its own set of benefits and disadvantages, and there is no single approach that works best for everyone. People must find a method that works for their situation, and consider hiring an unbiased financial planner if they are unsure. Given today’s economic climate, longer lifespans, and people looking for an active retirement, the reality is that many Baby Boomers will soon find a fourth approach – looking for retirement jobs to make their nest egg last longer.

The roughly 50 million retired and disabled Americans that receive monthly Social Security benefits are not projected to receive a Cost of Living Adjustment (COLA) for the next two years according to trustees who oversee Social Security. This would be the first time that Social Security beneficiaries haven’t received a cost of living adjustment since automatic increases were established in 1975.

Federal law mandates that Social Security benefits cannot go down – but here’s the catch: Medicare prescription drug program costs are set to rise. The costs associated with the Medicare prescription drug benefit are typically automatically deducted from monthly Social Security payments. Thus, if Social Security stays the same, and the automatically withdrawn costs for the prescription drug program go up – monthly checks will go down.

MSNBC reports:

Critics argue that Social Security recipients shouldn’t get an increase when inflation is negative. They note that recipients got a big increase in January — after energy prices had started to fall. They also note that Social Security recipients received one-time $250 payments in the spring as part of the government’s economic stimulus package.

“Seniors may perceive that they are being hurt because there is no COLA, but they are in fact not getting hurt,” said Andrew G. Biggs, a resident scholar at the American Enterprise Institute, a Washington think tank. “Congress has to be able to tell people they are not getting everything they want.”

Perhaps this is true, but today’s elders are in a precarious situation in that they spend a disproportionate amount of their income on health care needs, an industry that has expenses far exceeding inflation. Rising health care costs hit elders hard. Many seniors cannot just pick up more work hours to account for increased costs, and most have seen their investments and homes decrease in value. Is it any wonder that adults age 65 and older are the ones with the fastest growing credit card debt?

According to the public policy research group Demos, seniors at or below middle class income levels now bear an average of $10,235 in credit card debt. Mainstreet.com reports:

It’s not like the older set is blowing their credit card balances on frivolous items like Viagra or Virginia Beach golf vacations. Demos says that seniors are using their cards as a “plastic” safety net. Medical expenses are a common factor – the Demos study says that Americans 65-and-older have an average of $2,194 in credit card related medical expenses.

Think the Medicare prescription drug program cost increase won’t hurt? Think again.

In late 2006, Reverse Mortgage of America, a subsidiary of Seattle Mortgage, introduced “The Lifestyle Plan.” It was the first new reverse mortgage product to be introduced in nearly a decade. In 2007, Bank of America purchased the reverse mortgage products of Seattle Mortgage. The mortgages are being marketed as the “Senior Equity Reverse Mortgage,” and as of the writing of this post, is only available in Arizona, California, Delaware, the District of Columbia, Georgia, Maryland, North Carolina, South Carolina, Texas and Virginia.

Like the Cash Account Plan, the Senior Equity Reverse Mortgage allows homeowners age 62 and older to use some of the equity in their homes while continuing to live there. It is designed for owners of high-value homes. Borrowers may choose to receive their funds in a single lump sum, in regular monthly payments, as a line of credit, or any combination of these options. So, unlike the Cash Account Plan, the Senior Equity Reverse Mortgage offers a monthly payment to borrowers.

The interest rate on the Senior Equity Reverse Mortgage is the six-month London Interbank Offered Rate (LIBOR) Index, plus 2.95 percentage points. The interest rate may vary, but may not exceed 18%. Borrowers pay a loan origination fee of 1% of the home value but not more than $10,000. Borrowers also pay a monthly servicing fee of $25.

The proceeds from a Senior Equity Reverse Mortgage may be used to purchase a primary residence or a second home. The borrower would be responsible for a down payment equal to the difference between the value of the new home and the amount of funds received from the Senior Equity Reverse Mortgage.

This post was written with text from the Congressional Research Service report “Reverse Mortgages: Background and Issues, April 8, 2008.”

Financial Freedom Senior Funding Corp., of Irvine, CA, offers the “Cash Account Plan” as a proprietary reverse mortgage product. The Cash Account Plan is available to anyone 62 years or older who own homes with a minimum value of $75,000. It differs from other reverse mortgage products in that it does not offer the borrowers an option of getting monthly payments. It provides an open-end line of credit that is available for as long as the borrower occupies the home. The borrower can draw on the line of credit in full or part at any time; the minimum draw is $500. The unused portion of the line of credit grows by 5% annually. Eligible home types include owner-occupied single-family detached, manufactured, condominium, Planned Unit Development units, or one-to-four unit residences if one unit is owner-occupied. Borrowers are required to obtain counseling from an independent counselor prior to obtaining the loans.

A monthly servicing fee is automatically added to the loan. The interest rate charged to the borrower is equal to the current six-month London Interbank Offered Rate (LIBOR) plus 5 percentage points. The rate is adjusted semi-annually, but the interest rate may never rise more than 6 percentage points above the initial rate.

The Cash Account Plan is available in two forms: the Standard Option and the Zero Point Option. Under the Standard Option, a borrower pays a loan origination fee that is equal to 2% of the first $500,000 of loan balance, 1.5% of the next $500,000, and 1% on the balance in excess of $1 million.

Under the Zero Point Option, the borrower pays no loan origination fee. Closing costs, including third party costs and excluding state and local taxes, will not exceed $3,500. At closing the borrower is required to take a draw on the line of credit, and the minimum draw at closing is 75% of the line of credit. Subsequent draws have a minimum of $500. Full prepayment is permitted, and, while there are no prepayment penalties, partial prepayment on the initial draw is not permitted for the first 5 years. The Zero Point Option is generally marketed to senior homeowners with homes valued at $450,000 or more.

The Cash Account Plan is currently available in the District of Columbia and 24 states: Arizona, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Illinois, Indiana, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New York, Ohio, Oregon, Pennsylvania, Utah, Vermont, Virginia, Washington and Wyoming.

This post was written with text from the Congressional Research Service report “Reverse Mortgages: Background and Issues, April 8, 2008.”

Since November 1996, Fannie Mae has been offering its own reverse mortgage product – the “Home Keeper Mortgage.” This is the only conventional reverse mortgage that is available on a nationwide basis. Private lenders have developed proprietary reverse mortgage products but they are generally only available in a few states.

An eligible home owner must:

1. be at least 62 years old
2. own the home free and clear or be able to pay off the existing debt from the proceeds of the reverse mortgage or other funds
3. remain in the home as a primary residence
4. attend a counseling approved by Fannie Mae

The interest rate on the loan adjusts monthly according to changes in the one month certificate of deposit index published by the Federal Reserve. Over the life of the loan the rate may not change by more than 12 percentage points. The loan becomes due and payable when the borrower dies, moves, sells the property, or otherwise transfers title. The borrowers have the option of receiving monthly payments, a line of credit, or a combination of the two.

The Home Keeper plan may also be used for home purchase. Senior homeowners may use the Home Keeper reverse mortgage to purchase homes that better fit their needs. The homeowners would make a down payment and fund the rest of the purchase price with a reverse mortgage. It would mean no monthly mortgage payments.

Under both programs, the homeowner must keep applicable property taxes and hazard insurance current, and maintain the homes in good repair. The loan would become due and payable if the homeowner fails to do either of the above.

This post was written with text from the Congressional Research Service report “Reverse Mortgages: Background and Issues, April 8, 2008.”

The Housing and Community Development Act of 1987 authorized the Home Equity Conversion Mortgage Program (HECM) in the Department of Housing and Urban Development (HUD) as a demonstration program. It was the first nationwide reverse mortgage program which offered the possibility of lifetime occupancy to senior homeowners. Such mortgages are referred to as “tenure” reverse mortgages. The borrowers must be seniors who own and occupy their homes. The loan’s interest rate may be fixed or adjustable. The homeowner and the lender may agree to share in any future appreciation in property value. The program has been made permanent and the law was amended to permit its use for one to four family residences if the owner occupies one of the units.

The borrower can choose from five payment plans:

• Tenure – equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
• Term – equal monthly payments for a fixed period of months selected by the borrower.
• Line of Credit – installments at times and in amount of borrower’s choosing until the line of credit is exhausted.
• Modified Tenure – combination of line of credit with monthly payments for as long as the borrower remains in the home.
• Modified Term – combination of line of credit with monthly payments for a fixed period of months selected by the borrower.

The HECM law requires that the loan not exceed the Federal Housing Administration (FHA) mortgage limit for the area in which the property is located. The mortgage must be a first mortgage, which implies that any previous loan be paid off. Prior to obtaining a loan, borrowers must be provided with counseling by third parties who will explain the financial implications of entering into home equity conversion mortgages as well as explain the options, other than home equity conversion mortgages, that may be available to senior homeowners. To prevent displacement of senior homeowners, HECMs must include terms that give the homeowner the option of deferring repayment of the loan until the death of homeowner, the voluntary sale of the home, or the occurrence of some other events as prescribed in HUD regulations. The borrower may repay the loan without penalty.

Borrowers are required to purchase insurance from FHA. The insurance serves two purposes: 1) it protects lenders from suffering losses if the final loan balance exceeds the proceeds from the sale of a home, and 2) it continues monthly payments to the homeowner if the lender defaults on the loan. At loan origination borrowers are required to pay an up-front mortgage insurance premium (MIP) of 2% of the maximum mortgage amount. In addition, borrowers pay an annual insurance premium of 0.5% of the loan balance. Borrowers do not directly pay the insurance premiums. Lenders make the payments to FHA on behalf of the borrowers with the cost added to the loan balance.

When the home is eventually sold, HUD will pay the lender the difference between the loan balance and sales price if the sales price is the lesser of the two. The claim paid to the lender may not exce3ed the lesser of 1) the appraised value of the property when the loan was originated, or 2) the maximum HUD-insured loan for the area.

This post was written with text from the Congressional Research Service report “Reverse Mortgages: Background and Issues, April 8, 2008.”

Reverse mortgages are the opposite of traditional mortgages in that the borrower receives payments from the lender instead of making payments to the lender. Reverse mortgages are designed to enable senior homeowners to remain in their homes while using the equity in their homes as a form of income. In general, reverse mortgages may take on of two forms: term or tenure. Under a term reverse mortgage, the borrower is provided with income for a specified period. Under a tenure reverse mortgage, the borrower is provided with income for as long as he or she continues to occupy the property.

For borrowers, the most risky reverse mortgage is the term reverse mortgage. Borrowers have been reluctant to enter such mortgages because at the end of the loan term the borrower would likely have to sell the home and move. For lenders, the most risky reverse mortgage is the tenure mortgage, because the mortgage debt grows over time, and the debt could exceed the value of the home if the borrower lives longer than his or her life expectancy. The use of tenure reverse mortgages has grown in recent years due to the availability of an FHA-insured reverse mortgage. Under the FHA program, the risk of the borrower living too long is shifted to the federal government.

There are three common types of reverse mortgages:

1. Home Equity Conversion Mortgage Program (HECM)
2. Home Keeper
3. Cash Account Plan

There is a fourth, “Senior Equity Reverse Mortgage” plan, but it’s (at present) only available in Arizona, California, Delaware, the District of Columbia, Florida, Georgia, Maryland, North Carolina, South Carolina, Texas and Virginia.

All of these plans are tenure reverse mortgages. These tenure mortgages also provide the borrower with flexibility on how the income from the mortgage is received. A borrower may receive monthly payments as long as the property is occupied by the borrower. The borrower may receive a line of credit which grows at some specified annual rate and upon which the borrower may make draws as needed. The borrower may choose to receive a large up-front cash advance. Or the borrower may choose any combination of the above.

This post was written with text from the Congressional Research Service report “Reverse Mortgages: Background and Issues, April 8, 2008.”

A Durable Financial Power of Attorney (DFPOA) form is a legal document that identifies another person as being able to make financial decisions on your behalf should you become unable to make the decisions yourself. The “durable” means the power granted in the document remains in force should you become incapacitated. A POA that is not “durable” becomes ineffective at the time you become incompetent. This is like a Durable Medical Power of Attorney, only it deals with financial decisions, not medical decisions. The person you identify to make decisions on your behalf is referred to as your agent, and he/she is required to act with your best interests in mind, and must avoid conflicts of interest.

Your DFPOA form can specify that it takes effect when signed, or in the event you become incapacitated. The document may also speak to specific financial actions your agent can or cannot make. Examples of decision making abilities include:

• Use your money to pay everyday expenses
• Manage your retirement accounts
• Pay taxes
• Buy insurance for you
• Transfer property
• Invest your money in stocks, bonds, etc.
• Collect Social Security or other government benefits

A DFPOA form can sometimes be obtained from financial institutions, but elder attorneys will provide assistance, or you may be able to find a standard form from your state’s Attorney General’s Office. You can find your Attorney General’s contact information by visiting the Resources by State page. I would advise against using any free, standard form available online unless it’s from a reliable source and is written specifically for the state in which you reside. The document will almost certainly need to be signed in front of and by a Notary Public.

If you do not have a DFPOA and someone has to make financial decisions for you, court proceedings may be required. Having such a document in place saves your family a lot of work if it is ever needed. If you anticipate the potential need for a DFPOA, you may also consider putting a Durable Medical Power of Attorney and/or a Living Will in place at the same time.