FI­NAN­CIAL FO­CUS

Don’t throw mort­gage into re­verse

The Covington News - - Business - Rick Rogers

If you’re like many home­own­ers in this coun­try, you prob­a­bly saw your house ap­pre­ci­ate in value quite a bit over the past few years. That’s the good news. The not-so-good news is that, dur­ing this same time pe­riod, your sav­ings and net worth might have stag­nated or fallen. What does this mean for you? It could mean that when you re­tire, you do what a lot of cur­rent re­tirees are do­ing: us­ing the eq­uity in their homes to fund a large por­tion of their re­tire­ment. And that is not a good thing.

Be­fore looking at how re­tirees are tap­ping into their home eq­uity, let’s re­view a few statis­tics from a re­cent sur­vey by the Fed­eral Re­serve. (The sur­vey, re­leased in early 2006, cov­ers the years from 2001-2004.)

• The typ­i­cal Amer­i­can house­hold’s net worth (as­sets mi­nus debts) in­creased only slightly, from $91,700 to $93,100.

• The typ­i­cal fam­ily’s sav­ings (in­clud­ing re­tire­ment ac­counts) fell from al­most $30,000 to just $23,000.

• The me­dian value of homes rose from $131,000 to $161,000, a 22 per­cent jump.

By looking at th­ese num­bers, you can eas­ily see the prob­lem that many re­tirees are fac­ing: too few liq­uid re­sources avail­able to com­fort­ably sup­port them­selves dur­ing their re­tire­ment years. Con­se­quently, an in­creas­ing num­ber of re­tirees are tak­ing out “re­verse mortgages.” This is a spe­cial kind of loan that en­ables bor­row­ers to con­vert their home eq­uity into cash, ei­ther through a line of credit or in­stall­ment pay­ments.

But if you ever de­cide to sell your home, you will have to pay back what you bor- rowed on your re­verse mort­gage. And if you were to die and leave the house to your chil­dren, they would have to pay back the loan.

Clearly, th­ese are po­ten­tially big draw­backs to tak­ing out a re­verse mort­gage. And that’s why, if you have many years to go un­til you re­tire, you’ll want to give your­self more op­tions for boost­ing your re­tire­ment cash flow. Here are two to con­sider:

• “Max out” on your IRA each year. Put in the max­i­mum al­low­able con­tri­bu­tion to your Roth or tra­di­tional IRA each year. And fund your IRA as early as pos­si­ble ev­ery year; the more time you have on your side, the greater your growth po­ten­tial.

• In­crease your 401(k) con­tri­bu­tions with ev­ery raise. Each time you get an in­crease in salary, de­fer more money in your 401(k) or other em­ployer-spon­sored re­tire­ment plan. As you en­ter re­tire­ment, you may be able to boost your in­come by do­ing the fol­low­ing:

• De­lay tak­ing So­cial Se­cu­rity. You can be­gin col­lect­ing So­cial Se­cu­rity at age 62, but your monthly checks will be larger if you can wait un­til your full re­tire­ment age, which can be any­where from 65 to 67.

• Pur­chase an im­me­di­ate an­nu­ity. An im­me­di­ate an­nu­ity works pretty much as its name sug­gests: You make a lump-sum pay­ment to an in­sur­ance com­pany, and you im­me­di­ately start re­ceiv­ing an in­come stream, which can last the rest of your life. Make sure you pur­chase an an­nu­ity from a com­pany that re­ceives high rat­ings from one of the in­de­pen­dent rat­ing agen­cies.

You work hard for much of your life to own your home — so do what­ever you can to keep it once you’ve re­tired.

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