section 1 - The American College Online Learning Center

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SECTION 5: TAP HOME EQUITYLO 3-5-1: Choosing an appropriate strategy for tapping home equity inretirement1. Options for tapping home equity (Video: What are the different ways to access homeequity to fund retirement needs? Littell, Stucki)a. Conventional home equity loans(1) Because the reverse mortgage has high up-front costs, it is a better optionfor a client when costs can be amortized over a longer period—meaningwhen the individual is planning to stay in the home for a long time.(2) A conventional home equity loan or line of credit has lower up-front costswhich makes it a better option to tap home equity for people who do notplan to stay in the house for a long time.(3) Limitations of a conventional loan:(a) If the borrower cannot make required loan payments, he can endup in a foreclosure situation.(b) The participant has to have sufficient income to qualify for aconventional loan.b. Planning Point: The home is a finite resource. Planners need to help clientsconsider how the house fits into their long-term retirement planning goals.c. Single purpose loansd. Downsize(1) State and local governments may offer single purpose loans (property taxdeferral, for example) to those of modest income.(2) Similar to reverse mortgage in that repayment is not required until theborrower leaves the home.(3) The advantage of a single-purpose is that they are lower cost loans and insome cases the loan may be forgiven.(4) A disadvantage is that once one of these loans has been taken you maynot be able to tap additional equity.(5) These loans may not be available everywhere and may only be availablefor those whose income is lower.(1) Is one popular approach to tapping home equity(2) One challenge is that many clients wait to sell until there is a crisis.(3) Another challenge is that there may be no appropriate cheaper housingin the desired geographical area.e. Reverse mortgage(1) This is a good approach if the homeowner will live in the house for manyyears.(2) Reverse mortgages are nonrecourse loans. Homeowners are neverresponsible for any amount more than the value of the house.(3) A range of distribution options are available and an individual can switchoptions3.24
2. Reverse mortgage basicsa. Almost all loans today are made under the Home Equity Conversion Mortgage(HECM) program. The HECM encourages lenders to make loans by providingFHA insurance to the lenders.b. To qualify, all owners must be age 62 or older and the loan can only apply toa principal residence.c. The amount of loan payments made to the client depends on the client's age, thevalue of the home, and the interest rate and fees that are being charged.d. Repayment is required only when the last surviving borrower dies, sells the home,or permanently moves.e. The outstanding balance on the loan grows with interest until it is repaid—andif repayment does not occur for many years much of the home’s equity will beused up.f. Reverse mortgage loans are nonrecourse, meaning the maximum amount thathas to be repaid is the value of the home.g. If property values have eroded, and the outstanding balance on the loan exceedsthe value of the home, the homeowner or the heirs are not responsible for thedifference. This is the situation in which the FHA would make up the difference.h. If the home’s value exceeds the loan amount, the owner or heirs would receive thewindfall when the home is sold.i. Since the transaction is a loan, there are no income tax consequences when thehomeowner receives payments or the loan is repaid.j. Payment options available:(1) Options include a lump sum, line of credit and tenure option—meaning thatmonthly payments for as long as the borrower remains in the home(2) Since the loan balance grows with interest, the homeowner will use upless equity in the long run by withdrawing amounts only as the income isneeded—meaning that the line of credit or monthly payments are oftenthe best options.3. What retirees are likely to need to tap home equity in retirement (Video: What are somestrategies for using home equity in the decumulation phase of retirement? Littell, Stucki)a. Traditional thinking is that reverse mortgages are for those who are house richand cash poor.b. Only a small percentage of older homeowners fall into this “house rich and cashpoor” category (5%) and these are generally elderly widows.c. Majority are in the middle income group with less than $40,000 in income andapproximately $200,000 in home equity.(1) Because their resources are modest, this group is most likely to be tappingtheir home equity.(2) Opportunities4. Different strategies for using equitya. To increase income(a) This middle market group is traditionally not the target of financialadvisors.(b) Large number of homeowners who will be looking for advice as tohow to use home equity in retirement3.25
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Huebner School SeriesHS 353 STUDY O
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THEAMERICANCOLLEGE.EDUThrough The A
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c. But it is more comprehensive bec
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(3) Work part-time during retiremen
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SECTION 2: UNDERSTANDING RETIREMENT
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d. Solutions(1) The model considers
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. Other sources of retirement incom
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c. Another option for solving cash
Page 23 and 24: (b) Net worth statements that ident
Page 25 and 26: d. Be ready to reengage with the cl
Page 27 and 28: (b) In financial planning(c) In inv
Page 29 and 30: j. Planning Point: Planners can use
Page 31 and 32: e. We also need them to have a bett
Page 33 and 34: Assignment 2IDENTIFY RETIREMENT INC
Page 35 and 36: (2) Income4. Determining risk toler
Page 37 and 38: collaborative experience which focu
Page 39 and 40: 6. Asset allocation and risk tolera
Page 41 and 42: c. How long will the income last?d.
Page 43 and 44: . Durationc. Reliabilityd. Other6.
Page 45 and 46: c. Supplemental Security Income (SS
Page 47 and 48: . An unused emergency fund can supp
Page 49 and 50: 5. Inflation(2) The expense method
Page 51 and 52: Assignment 3CHOOSE APPROPRIATE STRA
Page 53 and 54: . Save as a percentage of income an
Page 55 and 56: (1) Note that 38% of second income
Page 57 and 58: (4) The AARP website has a national
Page 59 and 60: 4. Contributions to IRAs and Roth I
Page 61 and 62: carve out the nondeductible contrib
Page 63 and 64: (2) Plus salary deferrals (for an i
Page 65 and 66: a. Example:(1) Save $10,000 in 25%
Page 67 and 68: (a) This requires knowing four fact
Page 69 and 70: . Solution(1) Li and Lin Lin are bo
Page 71 and 72: (1) The increase in dollar amounts
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Page 77 and 78: 5. Planning considerations(b) Keep
Page 79 and 80: (2) Some funds that are promoted as
Page 81 and 82: (1) Berstresser, Chalmers, and Tufa
Page 83 and 84: RESOURCES FOR COMPETENCY 3: CHOOSE
Page 85 and 86: (2) From the previous employer(s) p
Page 87 and 88: 8. IRA funded plans (IRAs, SEPs, SI
Page 89 and 90: . Does the distribution election fi
Page 91 and 92: 6. Net unrealized appreciation rule
Page 93 and 94: a. Tax-exempt plans include Roth IR
Page 96 and 97: 8. Calculating required distributio
Page 98 and 99: (2) Exception: If there are separat
Page 100 and 101: 5. Impactc. Tax rates are low in ea
Page 102 and 103: (7) Based on ordering rules, identi
Page 104 and 105: 7. A married couple who file jointl
Page 106 and 107: (1) Needed to provide the appropria
Page 108 and 109: 13. Transfers at deatha. Wills(2) A
Page 110 and 111: (1) The Retirement Equity Act manda
Page 112 and 113: (2) Beneficiary designation of bene
Page 114 and 115: 13. Overview14. Types(2) The donor
Page 116 and 117: (1) Charity needs only to payout in
Page 118 and 119: c. Access should be granted to an a
Page 120 and 121: nightmare of living probate might h
Page 122 and 123: (6) Powers to represent their princ
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c. If the policy is term coverage w
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e. Factoring personal and family he
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problem. On the other hand, we can
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d. Adding a cost of living adjustme
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g. Planning Point: Sometimes a high
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(2) Clients may not be able to “a
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c. Ensure that the client is receiv
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a. Example: Because of physical and
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options about where to get his/her
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(2) Facilities, monthly fees, and s
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8. Other strategies that help to co
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standard deviations of the returns
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a collapse in the real estate marke
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a. In a later competency we will di
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years of service with the employer)
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a. Planning Point: Planners should
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(2) If you have locked in food, ren
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(4) Loss-of-spouse risk—Deferred
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(1) Excess withdrawal risk—The us
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(5) Frailty risk—Managing assets
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7. Practice good career management:
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Assignment 6CHOOSE APPROPRIATE STRA
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c. Example: Chuck and Sarah divide
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e. The bucket approach can be thoug
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3. Understanding systematic withdra
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(1) The time horizon used in the ca
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12. Four percent is not the number.
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markets have declined by a specifie
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(2) Annuities and long-term care an
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anticipates ramping down her activi
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c. Each of the three portfolios wil
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SECTION 4: THE ESSENTIAL VERSUS DIS
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d. Clients give up investment contr
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geared toward long-term growth. Thi
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. Trade-offs involve:(1) Irrevocabl
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(1) Rate at which banks lend to the
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. Dollar-denominated liabilities of
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(a) Dividend taxed in year paid out
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4. Taxationtheir return generating
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. Close ended(1) IPO style launch(2
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(3) Tax control17. Conversations in
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(3) Mutual funds provide lower cost
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way to obtain increasing payments t
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protection from the downside risk w
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6. Today’s annuitization rates ar
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h. Planning Point: Markets are very
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a. The client may not be clear abou
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a. Problems with implementation are
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c. Product solutions work together
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(1) A problem is that if the client
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(b) A traditional fund company(c) A
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d. Evelyn is in great health and he
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RESOURCES FOR COMPETENCY 7: INTEGRA
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