This common delusion can wreck your lifestyle in retirement

Many boomers think they’ll retire debt-free, but that’s not likely to be their reality.

More than eight in 10 middle-income Baby Boomers – with an annual household income between $25,000 and $100,000 and less than $1 million in investable assets – now has at least some debt, according to a survey released Tuesday by insurance firm Bankers Life Center for a Secure Retirement. That finding was mirrored by a study from the nonprofit think tank Pew Research Center, out last year, showing that 80% of boomers had debt and the median amount was a little over $70,100.

And many boomers have more debt than ever: The average 65-year-old borrower now holds 47% more mortgage debt and 29% more auto debt than a 65-year-old did in 2003, according to inflation-adjusted data from the Federal Reserve Bank of New York released in February of last year.

And yet, many average boomers engage in this common delusion: That they’ll retire debt-free. More than half (53%) of non-retired, middle-income boomers say they plan to retire without debt, the Bankers Life data shows.

But the reality will likely be quite different. For one, middle-income boomers “have too much debt to be able to completely eliminate it before retiring,” says Scott Goldberg, the president of Bankers Life. Indeed, more than one in four (28%) now devote over 40% of their monthly income to debt, and about one-quarter (23%) have a mortgage with more than 20 years remaining, the data showed. (Some experts say that debt payments should take up no more than 10% of your income.)

Furthermore, data from current retirees show that it’s unlikely boomers will pay their debt down before retiring. Indeed, fewer than one in four retirees say they are debt-free, according to Bankers Life.

Of course, having some debt in retirement isn’t always a bad thing, as MarketWatch columnist Robert Powell discusses here, and plenty of retirees eventually pay off the debts they carry into retirement. (Pew data shows that only about 58% of the members of the Silent Generation, most of whom are retired, have debt – the lowest percentage of any generation.)

Still, all this debt is likely to put a crimp into the free-wheeling, traveling-often retirement lifestyle that many boomers say they want. “Debt is a financial obligation that limits financial freedom for boomers to live the retirement they expect and want,” says Goldberg. “As boomers retire, every dollar that they spend to pay off debt is one less dollar that they can spend on these new retirement activities.”


Don’t Bet Your Retirement On History Repeating Itself

People nearing retirement should take note of the fact that U.S. financial markets have entered uncharted waters now in regards to the low bond yields and high stock market valuations facing investors.

Classic safe withdrawal rates studies such as William Bengen’s and the Trinity study investigate sustainable withdrawal rates from rolling periods of the historical data, giving us an idea of what would have worked in the past. For a thirty-year retirement period, we can learn about the historical sustainable withdrawal rates beginning up to thirty years ago (i.e., 1986). The question remains whether those past outcomes provide reasonable expectations for the future.

This is worth repeating as it is important to remember and easy to forget. When looking at thirty-year retirements with historical simulations, we can only consider retirements beginning up to the mid-1980s.

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Due to sequence of returns risk, recent market conditions only show up at the end of these retirements and have little bearing on their outcomes. This matter extends beyond academic interest, as market conditions have witnessed historical extremes in recent years, such as the current historically low interest rates.

The general problem with attempting to gain insights from historical outcomes is that future market returns and withdrawal rate outcomes are connected to the current values of the sources for market returns. As John Bogle says in his brilliant 2009 book Enough:

My concern is that too many of us make the implicit assumption that stock market history repeats itself when we know, deep down, that the only valid prism through which to view the market’s future is the one that takes into account not history, but the sources of stock returns. [emphasis in the original]

These sources include income, growth, and changing valuation multiples. Future stock returns depend on dividend income, growth of underlying earnings, and changes in valuation multiples placed on earnings.

If the current dividend yield is below its historical average, then future stock returns will also tend to be lower. When price-earnings multiples are high, markets tend to exhibit mean reversion, so relatively lower future returns should be expected.

Exhibit 1 shows that stock market valuations have been high for much of the past twenty years, relative to the period until 1986 for which we know the outcomes from thirty-year retirements.

Exhibit 1
Robert Shiller’s Cyclically-Adjusted Price Earnings Ratio (PE10)

Source: Robert Shiller’s Data (

Returns on bonds, meanwhile, depend on the initial bond yield and subsequent yield changes. Mathematically, if interest rates stay the same, then current interest rates will reflect the subsequent return on bonds.

Low bond yields will tend to translate into lower returns due to less income and the heightened interest rate risk associated with capital losses if interest rates rise. This relationship is very tight.

Exhibit 2 shows that recent retirees have been dealing with low interest rates. We do not have much experience in the historical record with this type of interest rate environment, as the early 1940s was the only other period where 10-year Treasuries fell to the 2% range.

Exhibit 2

10-Year Treasury Yields at the Start of Each Year, 1871-2016

The PMT formula makes clear that sustainable withdrawal rates are intricately related to the returns provided by the underlying investment portfolio. With sequence of returns risk, the returns experienced in early retirement will weigh disproportionately on the final outcome.

Current market conditions are much more relevant than historical averages. Past historical success rates are not the type of information that current and prospective retirees need for making withdrawal rate decisions.

While the original Trinity study concluded that the 4% rule has a 95% chance for success, that only means the 4% rule succeeded in 95% of the rolling historical thirty-year periods. New retirees today should not count on the same 95% chance that the 4% rule will work for them.

Wade Pfau, Forbes

Strapped retirees are turning to reverse mortgages

Reverse mortgages have been around since the 1980s, but this once sleepy corner of the mortgage market really picked up during the Great Recession of 2008-2009, as thousands of cash-strapped seniors turned to what many financial advisors have long regarded as a loan of last resort.

Reverse-mortgage volume peaked in 2009 at about 114,000 loans and later returned to more typical levels. With another spike in demand potentially around the corner, federal regulators have been rolling out new rules designed to protect older borrowers and shore up the government-backed loan program.

The new rules – along with some changes in the way advisors view reverse mortgages – have helped to lessen the stigma around this much maligned slice of the mortgage market, which has come to be associated with TV ads featuring actor Henry “The Fonz” Winkler and other celebrity pitchmen.

Demand for reverse mortgages is expected to surge as greater numbers of baby boomers retire, many with not much saved. Through 2030, boomers are expected to retire at a rate of about 10,000 per day, according to a report by the Insured Retirement Institute. Some 59 percent of boomers expect Social Security to be a major source of their income during retirement, according to the report.

It’s not surprising, then, that reverse mortgages may become more popular again. Right now the reverse-mortgage market is a mere 1 percent of the size of the traditional mortgage market.

A reverse mortgage is a special type of home loan that allows borrowers who are at least 62 years old (and meet other eligibility requirements) to convert a portion of the equity in their homes into cash.

Loan proceeds can be taken as a lump-sum or monthly payment or as a line of credit. Interest is added to the loan each month, and the balance grows over time. A reverse mortgage must be repaid when the last borrower, co-borrower or “eligible spouse” sells the home, moves out or dies.

Most reverse mortgages are federally insured through the Federal Housing Authority’s Home Equity Conversion Mortgage program (HECM). The FHA – part of the U.S. Department of Housing and Urban Development (HUD) – reimburses lenders for losses tied to homes that sell for less than what is owed on the loans.

“We’ve tried to correct for some of the things we have noticed as the HECM program got more popular” during the last economic downturn, said Brian Sullivan, a HUD spokesman.

“This program was created to give seniors access to an incremental, sustainable financial resource to allow them to age in place, not as an ATM machine.”
-Brian Sullivan, spokesman for U.S. Department of Housing and Urban Development
“Retirement accounts got hammered,” Sullivan explained, “and TV commercials were telling people what a great thing these were.”

Under HUD’s new rules, borrowers can draw up to 60 percent of their initial principal limit in the first year of a loan, with some exceptions. In the past, some borrowers took out as much as they could up front and later found themselves with no capacity to cover critical expenses, including property taxes and homeowner’s insurance.

Borrowers who don’t pay their insurance and taxes on – or don’t make necessary repairs to – their properties are considered in default on their loans and may face foreclosure.

Some borrowers “were taking out the maximum amount of equity they could in these big, lump-sum draws initially,” explained Sullivan. “That exhausted all the equity available to senior borrowers and sometimes left them with little capacity to pay property taxes and insurance, which are an absolute condition” of reverse mortgages, he added.

“This program was created to give seniors access to an incremental, sustainable financial resource to allow them to age in place, not as an ATM machine,” Sullivan said.

Under the new HUD rules, lenders are also required to do a financial assessment of borrowers to determine whether they have the means to sustain themselves in their homes. If potential borrowers fall short, they may still qualify for reverse mortgages, but they will have limited access to the equity in their homes, because a certain portion of it must be “set aside” to pay for taxes, insurance and other property-related charges, such as homeowners’ association dues.

HUD has also implemented stronger protections for non-borrowing spouses. In the past, some seniors who weren’t eligible to be listed as borrowers because of their age, for instance, were forced to sell their homes or face foreclosure after borrowing spouses died or moved out (say, to assisted-living facilities) and loans became “due and payable.” Needless to say, consumer watchdog groups and advocates for seniors weren’t pleased.

Some brokers actually encouraged married couples to list one person on a loan in order to qualify for more proceeds under the formula that determines the maximum principal amount.

“Some of these borrowers didn’t understand that structuring the mortgage in this way put the non-borrowing spouse at extreme risk of being put out of the home at the death of the borrower,” said Sullivan, adding that, whenever possible, both spouses should be listed as borrowers.

Today a non-borrowing spouse can remain in his or her home, provided that person meets certain eligibility criteria and the lender and loan servicer agree to this. In order to be eligible, a non-borrowing spouse must have been married to the borrower at the time a loan was originated and has to be current on property taxes and insurance.

HUD – which requires prospective borrowers as well as any non-borrowing spouses to take part in a counseling session with a HUD-approved counselor – is expected to unveil more improvements to its HECM program in the coming weeks.

Jury’s still out – among advisors

But financial advisors remain divided in their opinions about reverse mortgages. Some continue to view them as costly loans of last resort and say potential borrowers should explore alternatives, such as a home equity line of credit or state and local programs for seniors. But some advisors have changed their tune on reverse mortgages.

According to the Consumer Financial Protection Bureau, reverse mortgages are usually more expensive than other types of home loans. Some experts say the loans, whose fees include initial and annual mortgage-insurance premiums, are comparable in cost to traditional mortgages with private mortgage insurance. Many borrowers finance the fees by paying them out of loan proceeds.

“I think reverse mortgages are appropriate for certain clients with limited other alternatives. However, I think the industry still requires a lot of cleaning up,” said Mark LaSpisa, a certified financial planner and president of Vermillion Financial Advisors, a fee-only firm.

For a couple of his clients, reverse mortgages have made a lot of sense, explained LaSpisa.

He recalls one elderly couple who took out a reverse mortgage in 2007 after depleting their savings and trying to scrape by on Social Security.

Their home was worth quite a bit, he recalls, but they still had a mortgage on it and its value was plummeting as a result of the housing bust. Their situation made it difficult, if not impossible, for them to refinance their home and take cash out or to take out a home equity line of credit, said LaSpisa.

The couple had four adult children who were financially independent and not concerned about whether they stood to inherit anything from the sale of their parents’ home. (If there is anything left over after a reverse mortgage is paid off, that money goes to the borrower’s estate.)

Proceeds from the reverse mortgage, said LaSpisa, helped to pay for nursing-home care for the wife, who had Alzheimer’s, and for a visiting nurse for the husband, making it possible for him to stay in the home.

“I don’t have a problem with the product as long as it is being applied to the right person and circumstances,” said LaSpisa.

Randall Bruns, a certified financial planner, says he has “come full circle” on reverse mortgages.

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“In the past, we planners thought of reverse mortgages as a last resort,” said Bruns, a private wealth advisor at HighPoint Planning Partners. He is compensated mostly on an hourly basis.

New research, he noted, has shown that establishing a reverse-mortgage line of credit early in retirement may mean the difference between success and failure when it comes to sticking to a financial plan.

A reverse-mortgage line of credit, Bruns said, can give a retiree access to cash that can be used to ride out market corrections. Retirees can pay back what they draw from a line of credit when markets recover, he added.

“We know that retirement plans are won and lost during the most violent market crashes,” usually because retirees are forced to sell depreciated assets to raise cash, said Bruns.

“Broad markets have always recovered, but that only matters if you still own the original shares,” he said.

– By Anna Robaton, special to

7 Important Financial Moves If You Turn 65 in 2016

Age 65 is a key time to take advantage of special savings opportunities, make important decisions about Medicare and Social Security, and in general take stock of your progress toward your retirement goal.

Sign up for Medicare (or not). For most people, turning 65 brings big changes in health coverage. You can sign up for Medicare anytime from three months before to three months after the month you turn 65. If you’re already receiving Social Security benefits, you’ll automatically be enrolled in Medicare Part A and Part B when you turn 65 and will receive your Medicare card in the mail three months before your 65th birthday. If you’re still working and don’t want Part B yet, you can send back the card and have it reissued for Part A only.

If you haven’t claimed Social Security benefits yet, you’ll need to take steps to enroll in Medicare. If neither you nor your spouse has employer health coverage, you should sign up for Part A and Part B. For an online application, even if you aren’t signing up for Social Security, see How to Apply Online for Just Medicare. Also see Social Security’s Apply Online for Medicare booklet for more information. The decision becomes more complicated if you’re still working and have employer coverage. See When to Sign Up for Medicare – and Why You Might Want to Delay for more information. Also see What You Need to Know About Enrolling in Medicare.

2) Fill in Medicare’s gaps. If you don’t have retiree health insurance, you’ll probably want a Medicare supplement policy (also known as medigap) to help cover Medicare’s co-payments and deductibles and a Part D drug plan to cover prescription drugs. Or you can get a Medicare Advantage plan, which provides medical and drug coverage from a private insurer. You have six months after you sign up for Medicare Part B to pick a medigap policy (after that, you can be denied or charged more for medigap because of your health). Most state insurance departments have price lists for the medigap plans available in their state. See for links. You can also find helpful information from the Medicare Rights Center. For more information, see How to Fill Medicare Coverage Gaps.

You can sign up for Part D when you enroll in Medicare Part B or, if you have other drug coverage (such as through an employer plan), you generally have 63 days after losing that coverage to sign up for a Part D plan without paying a late-enrollment penalty. For more information, see How to Save With a Medicare Prescription Drug Plan. Or you can enroll in a Medicare Advantage plan when you enroll in Part B or after losing other coverage. See When Can I Join a Health or Drug Plan?

You can also switch to another Part D or Medicare Advantage plan during open enrollment every year from October 15 to December 7. Shop for plans available in your area with the Medicare Plan Finder. You can get help with your decisions from your State Health Insurance Assistance Program. Also see When Can I Join a Health or Drug Plan for more information.

3) Make HSA changes. If you have a high-deductible health insurance policy, you’ll need to stop making HSA contributions when you enroll in Medicare. You lose eligibility to contribute to the HSA on the first day of the month that you turn 65 and enroll in Medicare, but you can contribute for the portion of the year before then. For example, if you turn 65 in October and enroll in Medicare, your maximum contribution would be 9/12 of the full year’s contribution, says Eric Dowley, senior vice president of health savings accounts for Fidelity. (You can continue to make HSA contributions after age 65 if you don’t enroll in Medicare Part A or Part B; see When to Sign Up for Medicare – and Why You Might Want to Delay for more information about these rules.)

Starting at age 65, you can pay premiums for Medicare Part B, Part D and Medicare Advantage (but not medigap) tax-free from your HSA, in addition to paying your deductibles, co-payments, a portion of long-term-care premiums based on your age ($3,900 in 2016 if you’re between ages 61 and 70) and other eligible expenses that aren’t covered by other insurance. You can also take penalty-free distributions from your HSA for any reason starting at age 65, but you’ll have to pay taxes on the withdrawals, so it’s better to use the money tax-free for eligible medical expenses.

4) Start planning your Social Security strategy. Age 65 is actually not a key age for Social Security anymore. The full retirement age is 66 for people born in 1943 through 1954. You can take Social Security benefits as early as age 62, but your benefits will be reduced for the rest of your life based on the number of months before full retirement age you start benefits (see Early or Late Retirement? for a calculator). Taking your Social Security benefits this year at age 65 will reduce your monthly check by about 7%. If you’re still working and take benefits before full retirement age, they could be reduced further if you earn more than a certain amount of money from a job or self-employment. See How Social Security Cuts Your Benefits If You’re Still Working.

But age 65 is a good time to start thinking about when to take benefits. If you wait until after your full retirement age to take Social Security benefits, you’ll receive a delayed-retirement credit that boosts your benefit by 8% for every year you wait until age 70. You can estimate your Social Security benefits under various scenarios by using Social Security’s retirement estimator. See Best Strategies to Boost Your Social Security Benefits for more information. Also see Some Social Security Loopholes Will Still Be Around in 2016 for new rules that can affect your claiming strategies.

5) Continue to make the most of catch-up contributions. If you’re 50 or older anytime in 2016, you can contribute an extra $1,000 to IRAs and an extra $6,000 to 401(k)s – bringing your contribution total to $6,500 for IRAs and $24,000 for 401(k)s. See Retirement Plan Contribution Limits for 2016. If you stop working but your spouse still earns some income for the year, he or she can contribute to an IRA on your behalf. See Contributing to a Spouse’s IRA in Retirement for more information.

6) Start preparing for retirement-savings withdrawals. Now that you’re over age 59½, you can withdraw money from your retirement-savings accounts without an early-withdrawal penalty. But you may need to pay taxes on your withdrawals. See Tax Planning for Retirement for more information. You don’t have to start taking required minimum distributions from your IRAs and 401(k)s until age 70½, but you will have more control over the tax bill if you gradually shift money out of the accounts now. You can roll over some money from traditional IRAs to a Roth IRA every year — ideally an amount that won’t exceed the top of your tax bracket – which will allow you to withdraw less money when you have to take your RMDs. (Money in Roth IRAs is not subject to RMDs, although you can’t avoid the RMD in the year of the conversion.)

Be careful of conversions, however, if you plan to sign up for Medicare Part B in the next year or two. If your adjusted gross income plus tax-exempt interest income is more than $85,000 if you’re single or $170,000 if you’re married filing jointly (including the amount of money you convert), you’ll have to pay the Medicare high-income surcharge. See How Much Will Your Medicare Part B Premiums Cost in 2016? for more information. Also see 8 Things Boomers Must Know About RMDs From IRAs.

7) Give yourself a retirement checkup. Even if you plan to work for a few more years, this is a great time to assess your progress toward your retirement goals. If you discover that you’re falling short, you still have time to save more money, work longer or make other changes to your plan. See How Much You Really Need to Retire for more information.

By Kimberly Lankford,

Advisors: Will Your Clients End Up on Medicaid?

Advisors know that even wealthy people can wind up on Medicaid if they don’t plan accordingly.

Mary Janisch, Midwest Division manager for U.S. Bank’s mass-affluent-focused Private Client Group, holds up her parents as real-life examples of how easily that can happen.

Her parents, now both deceased, had money, were successful and had planned for the future, but as is often the case, life didn’t play out for them as they expected. Her father, a successful medical malpractice defense attorney, had a serious heart condition, suffering the first of five heart attacks at age 47. He had quadruple bypass surgery and “every other type of heart procedure that is life-prolonging,” says Janisch.

Given his history, the couple did their best to protect Janisch’s mother, thinking she would likely outlive her husband. They bought a whole life insurance policy for Janisch’s father and a long-term-care policy for the mother because Alzheimer’s ran in her family.

As fate would have it, though, it was Janisch’s mother who passed away first-from cancer at age 72. And the father, in another cruel twist of fate, developed Alzheimer’s, leaving him vulnerable to an unscrupulous young woman who took advantage of him financially.

As a result, her father was left with only his VA and Social Security checks for income. He lived with his other daughter for a period of time, but as his disease progressed he had to be placed in a memory care unit of a nursing home, which cost $9,000 a month. The father had no choice but to go on Medicaid.

“He lived with means, but he certainly died without any,” Janisch says.

Fragmented Advice

Janisch notes that while her parents had received plenty of “fragmented advice” over the years, they had no one to pull it altogether. “They were from a generation where they didn’t share much about their financial situation or their plans,” Janisch says. “They did the best they could, given the information they had.”

Without a well-conceived, “holistic” financial plan, Janisch realized, destitution can strike anyone, rich and poor, especially if they’re hit with Alzheimer’s or other degenerative disease requiring long-term care. “Regardless of income level, you may not have the right things in place to protect your means. You’d be amazed at how quickly a devastating disease like Alzheimer’s can eat through what little you have,” she says.

In fact, it is estimated that 21.6% of long-term care costs are financed out-of-pocket by families who spend down their assets and then go on Medicaid, according to the Federal Commission on Long-Term Care.

‘Medicaid Estate Planning’

Reliable statistics as to the demographics of these families were hard to come by, with two camps offering different views as to what they looked like. One group believed that the majority of the families were indeed in dire straits and had genuinely run out of money. The other believed that many families had done creative “Medicaid estate planning,” intentionally spending down their money so as to appear poor and be eligible for Medicaid.

“There are two camps along those fault lines,” says John Cutler, the architect of the federal government’s long-term care insurance program, the largest in the country. “One believes a lot of Medicaid estate planning is going on and the other isn’t sure it really is that big of a problem.”

Whichever the case, being on Medicaid is not an enviable position to be in. Nursing home residents on Medicaid have to hand over all of their income, save for a small personal allowance, to the nursing home. In addition to a $60-a-month allowance, which varies slightly by state, nursing home residents are also allowed to deduct uncovered medical costs and an allowance for their spouses, if they live at home and need income support.

Moreover, nursing home facilities that accept Medicaid tend to be underfunded, so they’re unable to hire the best people and provide the best care, many experts say.

“It was challenging,” Janisch says of her dad. The meager stipend he received didn’t cover certain things like haircuts, and they had to keep detailed records and receipts of everything they spent the stipend on.

Advisors, of course, do their best to prevent their clients from falling into such a financially tenuous situation. Some use long-term care insurance and other products to help clients take the bite out of the huge costs they could incur if they become incapacitated.

Not Just Long-Term Care Insurance

For many, it’s not merely a matter of buying insurance but rather overall retirement planning. “In some cases, people may have to look into working longer than they might want to otherwise. It’s saving more, spending less, making the most out of Social Security,” says Joseph Tomlinson, a financial planner with Tomlinson Financial Planning, an investment advisor firm in Greenville, Maine.

Bradley Sova, a senior financial consultant with credit union DFCU Financial in Michigan, advises clients to start planning early and to make sure they’re contributing enough money toward their retirement savings.”I think it’s important that you have a plan at a younger age. Don’t wait till you’re 55 or 60 years old to start thinking about this stuff. You have to start decades in advance,” he says.

Craig Bartlett, a division manager for U.S. Bancorp Investments, the brokerage arm of U.S. Bank, urges his advisors to have their clients “stress-test” their plans. “Don’t just assume that things will continue on its way, but model in the impact of a long-term care event, model in the impact of a dramatic health issue,” Bartlett says. “Often times what you’ll find is that the plan that looks like you’re in terrific shape doesn’t really stand up to some challenges that might come.”

By Margarida Correia

New Products Address Shortcomings of Long-Term Care Insurance

A nursing home is the last place most people would want to leave their parents, but sometimes that’s exactly what they have to do.

Ann Marie Bailey, a financial advisor with Langley Federal Credit Union in Yorktown, Va., knows that from experience, having recently watched the children of two elderly clients struggle with making that gut-wrenching decision.

The children’s mother, Laura Puck, 85, insisted that she stay in her home, even after a series of minor strokes left her unable to take care of herself. After her husband passed away in May, she grew even more adamant, clinging to the home she long shared with the love of her life.

“They met in the third grade,” says Bailey of the elderly couple. “They were each other’s worlds.”

Sadly, there was little the children could do for their grief-stricken mother. Their parents’ long-term care policies covered only nursing home care, so they had no choice but to put her in a home to collect long-term care benefits. Regrettably, neither of the two had the resources or the ability to care for her on their own. (The mother’s name was changed to protect her privacy.)

Adding to the sting of the situation was the fact that the parents, who had been paying monthly premiums for more than 20 years, had never collected a penny in long-term care benefits prior to the children’s decision to place their mother in a home.

If only the products that are available now were available to the Pucks when they first signed on for coverage decades ago. The shortcomings of traditional long-term care insurance policies, such as those that the Pucks had in place, have led to the development of a new generation of products to help consumers protect against the care expenses that come with old age. Over the past five to six years, new hybrid products that work long-term care provisions into life insurance policies and annuities have emerged on the market, giving people more options, particularly those too old to otherwise qualify for straight long-term care insurance.


“What’s great about these hybrid products is that it’s a simpler approach than traditional long-term care insurance,” says Rob Comfort, executive vice president of institution services business consulting at LPL Financial. “With these hybrid products, you can typically use those dollars for many different purposes, including in-home and rehabilitation care.”

The new products are more flexible and address many of the drawbacks that have made consumers wary of long-term care insurance. The biggest gripe with traditional long-term care policies is that buyers could pay thousands of dollars in annual premiums and never receive any benefits if they died before they needed long-term care. The new products address this issue by offering a death benefit in the event that the insured dies before using all of the long-term care benefits.

“If you drop dead from a heart attack, you would never even get the benefit of the policy,” Bernie Krooks, an elder-law attorney and founding partner of New York law firm Littman Krooks, says of long-term care insurance.

Buyers of traditional long-term care policies have also complained of unrelenting premium hikes, causing many to abandon-or think about abandoning-policies at a point in their lives when they are most vulnerable to long-term care expenses.

A young working woman may have purchased a policy for $3,000 a year to cover $200 a day for nursing home care, but with premium increases she could still have found herself in trouble later on, explains Krooks. She could easily have wound up paying $8,000 a year or faced a reduction in the daily benefit just when she needed the coverage.

For older people, traditional long-term care insurance, if available at all, is also very pricey, given the risks the insurance company assumes. To be sure, an LTC insurance policyholder may end up making lifetime payments without ever collecting benefits, but the insurer is on the hook for the policyholder’s expenses as soon as the policyholder makes that first small payment. (Purchasers of the new products, in contrast, typically hand over a lump sum upfront.)

All this has made many people unwilling to buy long-term care insurance. With the new products, the industry is aiming to make up for the shortcomings of LTC insurance and hopefully recover from its huge black eye.


But acceptance of the new products is unlikely to come easily and not just because of the negative perceptions surrounding LTC insurance. People don’t generally picture themselves decades down the road walking around with a cane, much less in a wheelchair, and therefore avoid making plans for their decline. Many simply refuse to believe that they’ll live long enough to need a wheelchair or a cane.

The statistics, however, say otherwise. Today, healthy 65-year-olds have at least a 40% chance of living into their 90s, according to AgeLab, a research program within MIT’s School of Engineering that works with business, government and NGOs to improve the quality of life of older people. And six in 10 men and eight in 10 women will need chronic care, per AgeLab’s stats.

Meanwhile, LTC costs-whether at home, in an assisted living facility or in a nursing home- have been rising steadily. According to Genworth’s 2015 Cost of Care Study, a private room in a nursing home facility costs a median of $250 a day, or $91,250 a year, up 4.17% from 2014. In big metropolitan areas, the cost is much higher, with nursing homes in New York going for $182,500 per year.

The cost of adult daycare has also risen sharply. Adult daycare providers charge a median of $69 a day, or $25,185 a year, a steep 5.94% increase from 2014, according to the Genworth study. (See more details in our story, Costs of Long-Term Care.)

“A middle-class person who gets sick and needs these types of services can become bankrupt very quickly,” says Krooks.

With the emergence of a new class of hybrid insurance and annuity products, the hope is that consumers will overcome their reluctance and start thinking about-and planning for-their twilight years. The new product innovations just might help the medicine go down a little easier.

Advisors, at least, are paying attention to the products. Interest is “off the charts,” reports Lauren Mitchell, vice president of product management for LPL Financial, adding that educational events on long-term care planning draw strong crowds of advisors.

In spite of this, use of the products remains tepid, with advisors still in a learning and fact-finding phase. The advisors primarily using the products are those who have already incorporated life insurance into their businesses, Mitchell says. “I still think we’ve got a long way to go before they really catch on.”


One product that is gaining traction blends life insurance with a long-term care rider that allows the insured to receive LTC benefits up to a maximum monthly amount for a specified period of time, typically three to six years. These policies also offer a death benefit to beneficiaries if the insured dies without taking advantage of the long-term care benefits. They typically cover a wide range of care arrangements, including at-home care, adult daycare, assisted living facilities and, in some cases, even nursing homes outside the United States.

The drawback to these hybrid products is that the death benefit is significantly less than it otherwise would be under a pure life insurance policy, but observers say this is understandable given that the insurance company agrees to pay for long-term care if and when the policyholder needs it.

“I’m a fan of these products,” says Krooks. “We feel that the client is better off buying something, instead of rolling the dice and hoping they’re not one of the 50% who’s going to need this and then end up becoming bankrupt.”

In 2014, some 94,000 life insurance policies with long-term care riders were sold, up 4% from 2013, according to LIMRA. These so-called “life combination” policies have gained significant ground on traditional LTC insurance policies. Last year, 131,000 LTC insurance policies were purchased.

Still, the new products are far from closing the gap with the older products. At the end of 2014, only 500,000 life combination policies were in force, compared with more than an estimated 4.8 million traditional LTC policies, according to LIMRA.

Other products are also making inroads in the LTC insurance market. One that is gaining attention combines the features of a fixed annuity with a mechanism through which annuity holders can withdraw money for qualified long-term care expenses. A person buying this product might, for example, invest $100,000. The investor would earn interest at a guaranteed minimum rate, while having the ability to withdraw funds for long-term care expenses up to a specified monthly amount over a predefined period-say two to five years. Under this arrangement, the investor would typically be able to withdraw the funds for long-term care expenses at any time. If, however, they needed part or all of their initial $100,000 back before a predetermined time, they would be subject to hefty surrender charges.

“The beauty of these products is that they have this ability to multiply and give the client up to two and three times the initial investment to pay for long-term care expenses,” says LPL Financial’s Mitchell. “At the same time, if they don’t ever actually need to use that money for long-term care expenses, they still have their initial investment and whatever that’s earning at the fixed rate of return.”

In addition, these hybrid annuity products typically offer a death benefit. If the investor never needs long-term care, the accumulated value of the annuity contract passes to the investor’s beneficiaries. Another advantage is that LTC benefit payments are income tax-free.


There are some drawbacks, however. Because of the surrender charges, investors who put money into these hybrid annuities should be certain that they won’t need the money for a while. “Annuity-based policies usually come with seven, nine, or 10-plus years of surrender charges and therefore introduce a big potential negative element if a client needed to pull some or all of the funding,” says Mike McDonald, a financial advisor with Bremer Bank in South St. Paul, Minn. (Raymond James is the third-party marketer for Bremer Bank.)

Still, for some people, particularly those too old to qualify for traditional LTC insurance, these new annuity products can serve a useful purpose. Bailey of Langley Federal Credit Union used this product to help a 79-year-old client who had no long-term care protection. The woman was looking for peace of mind as she never wanted to be a burden to her daughter, who had a child in college and issues of her own, Bailey explains.

Bailey transferred $220,000 of the $490,000 the client had invested in fixed annuities into a hybrid annuity with long-term care benefits. “We didn’t want to put all of it into a long-term care product,” Bailey says. (Cetera is the third-party marketer for Langley Federal Credit Union.)

The policy covers adult daycare and in-home health care, a big plus for the client who wanted to be cared for at home. Even though the policy has been in place for three years, the client luckily hasn’t had to use it. “But she is getting up there in years and it is a concern,” Bailey notes.


Unfortunately, for some people, even the newer LTC products won’t cover them. Such was the case for a client that Gina O’Callaghan, a financial advisor at Ventura County Credit Union in Thousand Oaks, Calif., has served for almost two decades.

The client, 80, was diagnosed with a debilitating disease in her 30s and was never insurable for long-term care. Over the years, O’Callaghan has seen her deteriorate from using a cane, to using a walker, to later using a wheelchair.

The client recently declined further, needing more than the part-time care she was receiving at home, which significantly increased her expenses. She now pays $8,000 a month for 24-hour care at home, up 60% from when she was just receiving part-time care.

Realizing that her expenses would increase as her disease progressed, O’Callaghan put together a plan that would allow her client to stay at home as she wished. The client was of modest means, having retired as a teacher.

O’Callaghan placed her money into two buckets. The bulk of it went into a managed account, where the funds are readily available. “We have a very large chunk of her money sitting in something that is still growing based on what her goals are and her needs are, but is also liquid, in case her income needs change,” says O’Callaghan.

The rest of her money went into variable annuities with income riders that guarantee growth to the income base regardless of how the market performs. The riders also provide a steady stream of income, once tapped, O’Callaghan says.

By Margarida Correia

2 Ways to Boost Your Income in Retirement

You don’t need to go back to work or hope for an inheritance to increase your retirement income.

Running out of money before you run out of life. It’s the biggest fear many retirees face. And, for baby boomers and succeeding generations without guaranteed pensions, it’s not just a night terror – it’s a realistic concern. Without adequate savings, a prudent lifestyle, and regular financial checkups, running low in retirement is a very real possibility.

In my last article I reviewed the two fundamental solutions when you find yourself running low in retirement – reducing expenses, and increasing income.

In that article, I went deeper into the two most powerful expense strategies: cutting discretionary spending, and downsizing your home. These are major levers you can throw on the expense side to modify your lifestyle, and salvage a financially independent retirement.

But they might not be enough. Or you might want to go further to ensure your comfort or security. So in this article I’ll explore the income-based solutions to running low in retirement.

As I’ve written, to be realistic, a retirement backup plan needs to be entirely under your control. It can’t rely on good fortune, the benevolence of others, or external economic conditions.

So, we won’t be discussing either working or inheritances here. Maybe you could return to some work in retirement. But that generally requires a cooperative economy or employer. And it may not be physically possible for older retirees. Or, maybe you can count on inheriting some family wealth, eventually. But inheritances are dictated by the life span and spending habits of others. You shouldn’t pin your baseline retirement comfort on factors you can’t control.

If you have investments, you may be tempted to try picking “better” ones that would outperform the market. But decades of research prove that it is impossible to consistently beat the broad market indexes. Not only do the majority of active stock pickers fail, but they also usually generate higher expenses along the way – a major headwind to success.

If your investment portfolio is very conservative – largely in cash, CDs, or bonds – you could allocate more to stocks to increase returns. But holding more stocks than is suitable for your risk tolerance is a dangerous game. You might bail out at a loss when the going gets tough. And it will get tough. Because, to potentially increase returns, you must add volatility to your portfolio and take on more risk of reducing returns. Selling at a loss would damage your perilous retirement finances even further.

Fortunately, you can still access a couple of powerful income-based strategies. You needn’t go back to work, hope for an inheritance, pick stocks, or change your asset allocation. There are other legitimate and safe approaches to increasing retirement income. But, they carry a critical prerequisite: You must have some assets – either investments or a home – to begin….


The first strategy for safely increasing retirement income is to purchase a fixed annuity. I prefer the plain vanilla single premium immediate annuity. With this type of annuity contract, you pay the insurance company a lump sum, and they then pay you a monthly income for life. There is no variability – no “upside,” or “downside” – in the income stream, other than perhaps inflation adjustments, if you pay for those. And fees are easy to assess, because you know precisely what you’ll pay, and precisely what you’ll get back, and when.

Fixed annuities are generally invested in bonds, yet they can pay more than the going rate on a typical bond fund. That is, they can substantially increase your investment income over what you could accomplish with your own investments, given a similar level of risk. How do they do that?

The first reason is simple: An annuity returns some of your principal to you, along with interest payments. That means you are consuming principal. When you purchase an annuity, you give up control over your principal and, in return, the insurance company returns portions of it to you over time to increase returns. But, you probably won’t get it all back unless you live longer than expected.

The second reason that an annuity can enhance returns is more complex. It’s called mortality credits – the technical term for the benefit you get by pooling your money with a large group of other people.

Individuals don’t know their lifetime in advance. If you’re managing money on your own, you must live conservatively to ensure you don’t run out. By contrast, an insurance company can know the statistical lifetimes of a large group quite accurately. That means the company can pay everybody a better income than they could afford on their own, confident that some individuals will die earlier than average, leaving assets to pay the incomes of those who live longer.

Add up both of these factors and you get a powerful result: When you purchase an annuity, you can usually increase your effective investment income yield by several percentage points, depending on your age. As a rough example, consider that as I write this, the SEC Yield on Vanguard’s Intermediate-Term Bond Index Fund (VBIIX) is about 2.5%. Yet reports that an equally safe fixed immediate annuity can pay a 65-year-old couple about 5.7% – more than 3 percentage points higher.

So, your liquid assets, whatever they may be, can go much further in providing retirement income as an annuity. Just understand that an annuity is not like your other investments. You don’t have access to your principal. So the downside, if you must put most of your assets into an annuity, is that it reduces or eliminates your cash reserve for dealing with unexpected expenses or leaving a legacy. But your heirs would probably prefer that you be self-supporting, even if it means they lose out on an inheritance. And an annuity can be instrumental in achieving that primary objective – baseline retirement security.

Reverse Mortgages

What if your investment assets are minimal or you’ve already maximized your income from annuities? Is there somewhere else you can turn to produce more retirement income? Yes, if you own or have substantial equity in your house, there is. It’s a somewhat complex and checkered financial product that has recently become more palatable. As noted retirement researcher Wade Pfau writes, “…recent research has demonstrated how financially responsible individuals can improve their retirement sustainability with a reverse mortgage.”

A reverse mortgage lets you generate income from your home equity, guaranteed for life as long as you stay in your home. You, or your heirs, may not own your home in the end, but you’ll never owe more on the loan than the value of your home. Government insurance protects you if the bank has problems producing income, and it protects the bank if you should consume all your equity before dying. From your perspective, the advantage is clear: using only your home, without requiring any additional assets, you now have access to an income stream that will last as long as you do.

Though recent reforms have reduced the costs and risks, reverse mortgages are far from a perfect solution. In my opinion, they should be considered a last resort. They remain complex, and expensive. They are sometimes sold aggressively in inappropriate situations. Used recklessly, they could result in losing your home. Why? Because you still must have cash flow to pay for taxes, insurance, and maintenance, or risk default. Given the expense and downside, the government requires financial counseling for reverse mortgages in most cases. But they are a legitimate choice in the right circumstances.

The biggest downside to a reverse mortgage in my mind is the expense. The transaction costs are similar to buying a home. At settlement there will be an origination fee (shop around for the best deal: only the maximum is set by the government), an upfront mortgage insurance premium (generally 0.5% of the appraised value), and other typical real estate closing costs. Then, for the life of the loan, the lender will draw down your home equity to pay its interest charge based on the market rate, an FHA insurance premium of 1.25%, and possibly a servicing charge. Those long-term charges will substantially erode your wealth, even though the effects may be hidden and muted by the regular income.

In my example calculations, about 5-7% of the available home equity disappears into fees at the start of a reverse mortgage. Then there are the monthly charges compounding for the life of the loan after that. If there is a cheaper way you can generate retirement income than a reverse mortgage, you should choose it instead. My figures show a reverse mortgage generating about a 3% draw against your total home equity for life, not adjusted for inflation. Compared to getting zero, that’s pretty good. But compared to annuitizing, or probable stock market returns, it’s nothing special.

The second biggest downside to a reverse mortgage is the complexity. The more complicated a financial instrument, the harder it is to determine the risks and value. You may have to rely heavily on mortgage professionals to understand and compare offerings. Two online calculators that I found useful in this process were from the Mortgage Professor and the National Reverse Mortgage Lenders Association (NRMLA).

Despite the drawbacks, reverse mortgages will likely be the best retirement income solution for many people who are “house poor” – stuck in large homes with inadequate cash flow. Downsizing would be preferable, but reverse mortgages are another option. Scott Burns writes, “Used for long term planning rather than emergencies, reverse mortgages are likely to become a major tool for the millions of Americans who have a lot more equity in their homes than in their retirement savings.”


How do these income-based strategies work in practice? For a typical retired couple, what is the potential financial benefit of annuitizing and taking out a reverse mortgage? To answer these questions, let’s analyze a simple scenario….

Assume a couple, both age 65, that is concerned about their ability to meet retirement expenses going forward. They have $500K in total saved investment assets, and they own their $250K home, free and clear.

For an initial retirement income strategy, they could try systematic withdrawals from their investments using a “safe withdrawal rate” (SWR), expected to preserve their assets over a 30-year retirement. What is that SWR these days? Well, it’s probably less than the historical 4%. In fact, Wade Pfau recently argued that it’s more like 2%. But, for our example, let’s give systematic withdrawals the benefit of the doubt, using a slightly more optimistic 3% SWR.

At a 3% SWR, this couple’s $500K in investments can safely generate about $1,250/month in inflation-adjusted retirement income. Coupled with Social Security, that might be enough, but it could be very tight, depending on their lifestyle. What if they want to live less frugally, and are willing to give up some control of their principal?

Well, as I write this, will let them buy an annuity with those investment assets that generates about $2,400/month. And the NRMLA reverse mortgage calculator shows they can take out a reverse mortgage on their home to generate about another $700/month for life. That’s a total of about $3,100/month in guaranteed retirement income.

So, by annuitizing plus using a reverse mortgage, this couple is able to nearly triple their available monthly retirement income versus what could be achieved using a safe withdrawal rate for their investments alone! By virtue of having some assets – investments and a home – and choosing to give up some control over their principal, they can significantly boost their retirement income. Though the final amount is not inflation-adjusted, it’s likely to exceed what they could safely draw from investments, for decades to come.


So that’s it. This article and the last have provided the ingredients for a backup plan on both the expense and income sides of retirement. The strategies I’ve described give you leverage to preserve a comfortable retirement, without charity from the outside, even in some of the worst-case financial scenarios.

The essential strategy for increasing retirement income is this: You give away some or all of your principal in exchange for more income. That also means that you lose some flexibility – for handling emergency expenses, gifting, or inheritance. But, in return, you get the peace of mind of guaranteed income for life.

Running low in retirement would be a nightmare. But there are solutions to keep you safe. If you are in this particular boat, you may have to give up pride of ownership in the vessel, but at least you can keep it afloat for the duration of the voyage!

Darrow Kirkpatrick,

Medicare Part B premiums to rise 52% for 7 million enrollees

For seven in 10 Medicare beneficiaries 2016 will be much like 2015. They will pay $104.90 per month for their Medicare Part B premium just as they did in 2015.

But 2016 might not be anything like 2015 for some 30% of Medicare beneficiaries – roughly 7 million or so Americans. That’s because premiums for individuals could increase a jaw-dropping 52% to $159.30 per month ($318.60 for married couples). And for individuals whose incomes exceed certain thresholds, premiums could rise to anywhere from $223.00 per month up to $509.80 (or $446 to $1,019.60 for married couples), depending on their incomes.

What gives? Blame the “hold harmless” provision in the law that addresses cost-of-living adjustments (COLA) for Social Security benefits.

That law limits the dollar increase in the premium to the dollar increase in an individual’s Social Security benefit, according to a report by Alicia Munnell of the Center for Retirement Research at Boston College.

At the moment, the consumer price index (CPI) is not expected to increase in the period used to determine the COLA for 2016.

And that means it’s very likely that Social Security recipients – for just the third time since automatic adjustments were adopted in 1975 – will not receive an increase in their benefit next year, according to Munnell’s report.

No COLA means no increase in Medicare Part B premiums. Or at least that’s the case for 70% of Medicare beneficiaries who are collecting Social Security and don’t pay an income-related higher Medicare Part B premium, says Mark Lumia, founder and CEO of True Wealth Group in Lady Lake, Fla., and author of Thinking Outside the Money Box.

As for the remaining 30% of beneficiaries, they have to cover the difference. “Under current law, Part B premiums for other beneficiaries must be raised enough to offset premiums forgone due to the hold harmless provision,” says Lumia.

Medicare Part B covers services such as lab tests, surgeries and doctor visits, and supplies such as wheelchairs and walkers that are considered medically necessary.

Who must pay the higher Medicare Part B premium? This group includes individuals who enroll in Part B for the first time in 2016; enrollees who do not receive a Social Security benefit; beneficiaries who are directly billed for their Part B premium; current enrollees who pay an income-related higher premium; and dual Medicare-Medicaid beneficiaries, whose full premiums are paid by state Medicaid programs, according to this year’s Medicare Trustee’s report.

What might you do or consider if you’re among those who have to pay the higher “not held harmless” Medicare Part B premium?

Individuals who enroll in Part B for the first time in 2016. “Enroll earlier if you’re already 65 and otherwise eligible,” says Michael Kitces, publisher of The Kitces Report and author of the Nerd’s Eye View blog. “If you’re not eligible now, I’m afraid you’re stuck.”

Enrollees who do not receive a Social Security benefit. Those who are already on Medicare now, or could apply immediately, and who were going to start Social Security benefits in the next year or so might consider applying right now instead, Kitces says.

“Those who file in the coming weeks should be able to get both Social Security benefits and Medicare in November and December, which are the two months used for measuring, and therefore make themselves eligible,” he says.

If you are among those who are currently considering different Social Security claiming strategies – such as file-and-suspend, restricted application and delay to age 70 – there’s no getting around it. You’ll have to do cost-benefit analysis to determine if the benefit of the strategy is greater than the cost of the increased Medicare Part B premium.

In the long run, though, Kitces says those who anticipate living a long time and who will benefit from delaying Social Security by several years should still delay. “The value of delaying Social Security is far more beneficial than the squeeze from hold harmless,” he says. Read Social Security And Medicare Claiming Strategies To Navigate The Looming 52% Medicare Part B Premium Spike and How The Medicare “Hold Harmless” Rules May Spike Part B Premiums By 52% In 2016.

Beneficiaries who are directly billed for their Part B premium. If you’re already getting Social Security benefits, request to have your Part B premium deducted from your Social Security check ASAP, and you should still have time to be eligible for hold harmless, says Kitces.

Current enrollees who pay an income-related higher premium. “It is critically important for folks to review the Social Security notice of 2016 Medicare B premiums that will be in mailboxes later this fall,” says Katy Votava, president of in Rochester, N.Y. “It’s not uncommon for people to qualify for a decrease because their income drops to a lower bracket as a result of specific life changing events.” The problem, says Votava, is that Social Security doesn’t know about those life changing events unless the person notifies the agency.

For those whose incomes are still above the thresholds: “Unfortunately you’re stuck here,” says Kitces. The Income-Related Medicare Adjustment Amount (IRMAA) was already locked in based on 2014 income. “If possible, get your 2015 income below the line, so that at least if hold harmless kicks in again … you can benefit slightly from the second time it flows through,” says Kitces.

Dual Medicare-Medicaid beneficiaries, whose full premiums are paid by state Medicaid programs. “Since your Medicare premiums are being paid by the state at this point, it doesn’t effectively matter whether hold harmless applies for you or not, as to the extent higher premiums occur, they will be paid by the state anyway,” says Kitces. “Not surprisingly, I believe there are some states who are not so happy about this.”

Back to normal. It’s also worth noting that in a few years, says Kitces, that when CPI presumably does increase again and Social Security benefits rise, the excess premiums on the 30% essentially unwind themselves.

“That’s why Medicare premiums dropped in 2013, after being up in 2011 and 2012 the last time this hold harmless scenario played out,” he says. “Which means, again, if you weren’t going to start Social Security and/or Medicare for several years anyway, this is a non-issue. It’s just those who would have started both, and soon, who may wish to accelerate claiming to try to get in under the wire.”

Robert Powell, USA TODAY

Why So Many People Still Fail to Maximize Social Security Benefits

Of all the subjects I have written about over the years, the most controversial has been the recommendation to delay the starting age for Social Security. That has been so ever since I helped former Wall Street Journal reporter Jonathan Clements with an article in his Sunday column many years ago. Both of us got record hate mail back then. The controversy returns whenever I write about delaying the start of Social Security.

There are multiple reasons for their arguments. The most frequent objections come from those who started early and try to justify it. Some got the recommendation in a financial seminar where the promoter advocated preserving as much savings as possible, perhaps to increase the promoter’s fees or possibly believing that the promoter could find high-return securities while retaining an allocation suitable for a retiree. Some got their information from like-minded friends or relatives or perhaps a hairdresser. Most were poorly informed and did not understand the large inflation-adjusted gains from the delay or spousal and survivor benefit gains.

Others have been deceived by Internet falsehoods. Most of these use low life expectancies, give no consideration to the 50% or more who will live beyond life expectancy, ignore the spouse’s needs, and commonly use far higher returns than achievable without unrealistic risk for anyone, much less a retiree.

Even more common are those who have done no real financial planning and are unwilling to engage a professional to determine if they are financially prepared to retire. Unfortunately, too few baby boomers have enough savings to even consider delaying Social Security without working longer. For several decades, savings rates have come down to the current 5%, according to data from the Bureau of Economic Analysis, about half of historical rates or what would be required for those with a significant pension-or a third of what would be required without a pension.

Then there are those that say that Social Security will not survive. It’s very difficult for politicians to cut benefits significantly. The ever growing number of elderly form a formidable voting bloc and are supported by the powerful AARP and Seniors Coalition lobbies.

Recently Congress eliminated “restricted applications” and “file-and-suspend,” both of which were little understood and underutilized ways to increase Social Security benefits.

Under current conditions, it’s more important than ever to find a way to delay the start of Social Security because returns are low and life expectancies are increasing rapidly. The majority of retirees will be living off little more than Social Security, so if there’s sufficient savings beyond what’s necessary for an emergency fund, consider a delay until 70 for the primary earner. If there’s still sufficient savings, the low earning spouse could delay till her or his full retirement age of 66 to 67.

It’s impossible to find a financially competitive life-time investment in which income increases by 6% to 8% for each year of delay, has an inflation-adjustment to boot, and virtually unmatchable spousal and survivor benefits.

By BUD HEBELER, The Wall Street Journal

HUD ‘Very Pleased’ with Reverse Mortgage Changes

Reverse mortgage changes are having a positive impact on the Home Equity Conversion Mortgage program, as intended by the Department of Housing and Urban development, agency officials said this week.

The changes most recently include the implementation of a financial assessment for all borrowers, which took effect in April 2015, as well as non-borrowing spouse protections that also took effect over the course of the last year.

“We are very pleased,” said Karin Hill, senior policy advisor for HUD’s Office of Single Family Housing. “[The program] has stayed very stable and the changes resulted in the outcome we had hoped for.”

Specifically, HUD has noted several changes for the better among the composition of current borrowers. The shift comes along with an overall decline in reverse mortgage volume directly following the Financial Assessment rollout, although monthly volume is along the pace of its previous-year totals, Hill noted.

In 2015 and 2016, there was a significant change in draw patterns at closing among reverse mortgage borrowers that HUD calls “very positive.” According to the department’s data, 63% of borrowers draw 60% or less of their proceeds at closing.

There has also been a marked shift away from fixed rate reverse mortgages; a trend which began prior to the financial assessment rollout, but has settled at 89% adjustable rate loans as a proportion of overall loan production.

“This has had a very positive impact on the risk profile [of the program],” Hill said.

HUD is currently working on a new HECM rule that will include many of the program changes that have taken place of late; a rule that is expected to be proposed in the coming weeks and will seek comments from the public. Within those changes, lenders can expect to see some clarifications of Financial Assessment details as well as a subsequent publication of the new HECM handbook, HUD’s officials said.

Among several concerns expressed by the Department are the proportion of HECM-to-HECM refinance transactions being closed currently, borrowers who are making large repayments shortly after closing, as well as possible steering issues relating to reverse mortgage counseling.

“Out in the field, we have to monitor how people are selling the program,” Hill said. “Some things may not seem to be risk issues, but they are in fact risks.”

Overall, however, HUD praised the program changes, noting the positive impact they have had to the Federal Housing Administration’s Mutual Mortgage Insurance Fund.

“We aren’t at the end of the road yet, but we are very dedicated to this program,” Hill said.

by Elizabeth Ecker,