section 1 - The American College Online Learning Center

income stream for their advanced years. If they both die in the time prescribedby the original retirement income plan, then the home and mutual fund can bebequeathed to their heirs through their will.h. Disadvantages of segregating a separate portfolio:(1) The client may not have the appropriate assets available to “put someaside” and therefore may hamper his/her ability to maintain the correctstandard of living in the early years of retirement.(2) Beneficiaries might feel “entitled” to specific assets and might resent losingthese assets at the advanced ages of their parents.6. Capitalize on the value of the home—Use a reverse mortgage, downsize and pull outequity, use the sale-leaseback strategy, or consider a home equity loan. We will focus onthe reverse mortgage strategy since it is the least obvious and one, which is growing inpopularity.a. A reverse mortgage is a loan against an individual’s home that does not requirerepayment as long as the client lives in the home (paid when the owner sellsthe home or dies).b. Planning Point: The client can get substantial amounts of money for current needswith no current payments by using a reverse mortgage.c. How it works:(1) Only available to owners 62 and older who own their principal residence(with little or no debt on the home).(2) Loan payment variables include:(a) Client’s age or joint ages (younger clients receive less income;older clients receive more income)(b) Current and expected equity (the more equity the larger the reversemortgage)(c) Interest rate and fees charged(d) The type of mortgage program—the HECM (the FHA’s Home EquityConversion Mortgage) program is the most popular (studied later)d. Payment options of a reverse mortgage include a lump sum payment at closing,or a credit line, or monthly paymentse. Planning Point: Most reverse mortgage loans are nonrecourse loans so themaximum that has to be paid back is the value of the home. In other words, overthe years the loan balance may well grow to exceed the value of the home and theclient or his estate will not be “on the hook” for the excess.f. If the client sells the home and the loan is paid off, the excess from the salebelongs to seller.g. Reverse mortgages are loans and not taxable.h. Using a reverse mortgage serves to mitigate longevity risk when the strategy isexecuted in the later retirement period. Also, note the nonrecourse feature of theloan protects against longevity risk because clients can’t outlive their monthlypayment option even if their payments exceed the equity in the home.i. Using a reverse mortgage serves to mitigate excess withdrawal risk when thestrategy is executed in the later retirement period since the home as a financialasset will not be consumed too early by the client.j. Disadvantages of a reverse mortgage:(1) Fees of a reverse mortgage can be high.5.9