Tuesday, December 12, 2017

A New View of Reverse Mortgages


At the 2017, Financial Planning Association (FPA) meeting, the topic of reverse mortgages in retirement decisions came up in several presentations. The new view of reverse mortgages is that home equity can be used as a financial planning tool and not just as a last resort. Below are some of the key concepts that were presented:

  • About 10,000 people today will reach age 62 for the next decade; 3,000 are still making a mortgage payment.
     
  • Reverse mortgages allow people to receive funds as a lump sum, a line of credit, or monthly payments.
     
  • With regard to criticism of that reverse mortgages “spend a child’s inheritance,” gradually depleting home equity via a reverse mortgage is no different than withdrawing money from retirement savings accounts.
     
  • Borrowers (or their heirs) will never owe more than their home’s value.
     
  • No payment is owed until the last living borrower permanently leaves the home.
     
  • People have three ‘buckets” of money as potential retirement income sources: Bucket 1: income, Bucket 2: nest egg (savings and investments), and Bucket 3: home equity. Bucket 3 home equity distributions via a reverse mortgage can be used to delay using Bucket 2 withdrawals during market downturns.
     
  • Some experts advise applying for a home equity line of credit at age 62 for possible use in later life.
     
  • Reverse mortgage payments can help protect other assets (e.g., long-term-care and life insurance premiums).
     
  • The CFPB recently issued a report that was critical of reverse mortgages as a financial planning tool. Some financial experts have questioned the methodology of this study, however. Bottom Line: there are a variety of opinions about the benefits and disadvantages of reverse mortgages for older homeowners. Potential borrowers need to examine them closely to determine if RMs are a good fit for them.

Thursday, December 7, 2017

Give Yourself a Financial Check-Up


A financial check-up  is as important as an annual physical with your doctor.  Like a medical exam, a review of your finances can identify strategies to improve “financial fitness” (e.g., saving more money and diversifying investments and screen for potential problems, such as lack of a will or a high debt-to-income ratio.

Check-up Method #1 is financial quizzes.  Rutgers Cooperative Extension’s Financial Fitness Quiz consists of 20 questions about various financial practices.  Those with a low score indicate areas for improvement. Another check-up method is a net worth statement.  Net worth is assets (what you own) minus debts (what you owe). 

Assets have three categories: liquid (cash assets, such as a CD or money market mutual fund), tangible (personal property such as a house and car), and investment (examples: mutual funds and 401(k) plan).  Short-term debts are those that you expect to repay within a year (example: credit cards) and long-term debts, like a mortgage, last longer.

Another financial check-up tool is the “Wealth Test” from the book The Millionaire Next Door which assesses financial progress based on two key factors: age and pre-tax (gross) income.  Simply multiply these two figures together and divide by 10 to see what your net worth should be.  Obviously, the higher the number relative to this benchmark, the better.

The next time you’re scheduling a medical check-up, take time to assess your finances also.  For resources to analyze your finances, visit the Rutgers Cooperative Extension personal finance Web site.

Friday, December 1, 2017

Factors That Contribute to Financial Success


At the 2017, Financial Planning Association (FPA) meeting, the final general session speaker was financial author and speaker Jean Chatzky. Her topic was “What the World’s Wealthiest, Most Successful People Do Differently.” Below is a description of six key success factors that were described in this presentation:

 

  • Optimism/Happiness- People who score “8” on 1 to 10 scale have greater problem-solving ability, longer lifespans, and increased success. Chatzky advised “prioritize doing things instead of acquiring things.”
  • Resilience- People are not born with resilience. Chatzky advised attendees to “Control the things that you can control” and “take action when you feel stuck.”
     
  • Connectedness- Chatzky advised attendees to build their “social capital” by sharing information, resources, and contacts. In addition, strong relationships need to be built in person and not just online.
     
  • Passion- People with passion view work as a calling, “want things more,” and work hard to achieve them.
     
  • Good Financial Habits- An example is habitual savings. Automatic savings deposits make it easier to delay gratification and save for your “future self” 20 to 50 years from now. Our future selves are strangers.
     
  • Gratitude- Grateful people five back to individuals, organizations, and communities. They are also less likely to be affected by depression. The antidote to materialism is charity inspired by gratitude.




 

Wednesday, November 22, 2017

Behavioral Economics and Financial Decision-Making

Happy Thanksgiving! Let's give thanks for all the "nudges" that we have available to help us manage our money better and live more fulfilling lives.


Human beings often make decisions based on mental shortcuts and emotions instead of logical, straightforward thinking. Behavioral economics (finance) is a field of study that combines personal finance with psychology and sociology to study human decision-making. Studies have found that behavioral economics principles can be used to encourage people to adopt positive financial practices. For example, the way that financial decisions are framed (e.g., as a gain or a loss) can affect the decisions that people make.


In addition, people can be “nudged” to do the right thing (e.g., save for retirement). An example is automatic enrollment in employer 401(k) plans where workers are defaulted into a retirement savings account unless they proactively opt out. There are also examples of non-financial public policy “nudges.” For example, in some countries, people are defaulted into donating their organs when they die, unless they opt out. People have also been “nudged” into making healthier food choices in experiments about where foods are placed in a supermarket.


Are you being “nudged” to make wise financial decisions? Were you auto-enrolled to save for retirement by your employer or have you signed auto-escalation paperwork to automatically increase your retirement plan savings every time your income increases? If so, you are putting behavioral economics principles on your side. Inertia is a powerful force and workers who are “nudged” to save usually continue to do so. Even small “nudges” can make a big difference in your future financial well-being.



Friday, November 17, 2017

FinCon Nuggets That You Can Use


Last month, I attended FinCon, a conference that attracted about 1,700 personal finance content creators (e.g., authors, bloggers, podcasters). Below are three take-aways that resonated with me and might be useful to you:

 

¨     Author/speaker Farnoosh Torabi stated “Making more money is not a goal but an obligation.” By this she meant that, when people earn more money, they can give more back to others. Studies have found that women, especially, do this. A state of “enoughness” is a privileged place. When people achieve this state of financial well-being in their life, they have opportunities to make an impact on others.

 

¨     Author/speaker David Bach gave away free copies of an updated version of his book The Automatic Millionnaire. In this book, he uses the phrase “Latte Factor” as a metaphor for small expenses that add up over time. “It is not about taking away someone’s coffee,” he noted. Why pay attention to small expenses? The answer is very simple, Bach noted. “If you don’t save any money, you won’t have any money.”

 

¨     A reporter for a large city newspaper noted, in a small group discussion, that it is not yet known who hacked Equifax. There are some experts who believe that the stolen data will be used more for espionage purposes with high profile individuals than for identity theft of ordinary consumers. Time will tell. In the meantime, all we can do is be vigilant: check credit reports regularly, consider freezing our credit, carefully review bank and health care provider statements, and file federal and/or state income tax returns early during tax season.
 
 
 
 
 
 

A New View of Reverse Mortgages

At the 2017, Financial Planning Association (FPA) meeting, the topic of reverse mortgages in retirement decisions came up in several prese...