How My Hip Surgery Got Me Thinking about What I’m Retiring To

I had my hip replaced last month.  After spending three days in the hospital, I spent a couple weeks at home recovering.  And I was bored.  Really, you can watch only so many reruns of Gun Smoke or CNN’s nonstop coverage of Trump and Comey before all your energy is depleted.  The hospital certainly isn’t a resort, but, unlike my house, it’s buzzing with activity.  Just ask anyone who’s ever tried to settle into a long nap during a hospital stay.

Anyhow, I’m on my way to a full recovery.  While I was home, however, I had time to think.  That is, think about my retirement.  Not that I’m planning on retiring any time soon, but my recovery has given me time to envision what I want my retirement to look like.  And that vision doesn’t include old TV westerns.

Most of us don’t spend nearly enough time thinking about what we want our retirement to look like.  Instead, we tend to create this grand vision of what we think retirement will be like.  Most of us have been misled to believe that retirement is nirvana with endless days playing golf or sitting on a beach sipping drinks with umbrellas.

If you’re 5 to 10 years out from retirement, now is the time to start exploring the meaning of your work.  What role is work playing in your life? If you’re like most, you tend to undervalue the benefits of work in your life.  They go well beyond collecting a paycheck.  French researchers have found a link between delaying retirement and reducing the risk of Alzheimer’s and other mind-robbing diseases.  For each additional year you work, you reduce your risk by 3.2 percent.  What’s more, working longer also contributes to longevity.  On a recent retirement webinar, the facilitator cited an 11% (!) increase in life span for each additional year people work.  As an investment advisor, I’d say that’s a pretty good return.  What it all comes down to is staying engaged.  It’s the engagement with life that helps prolong life.

Let’s be clear.  Just because you’re leaving work, doesn’t mean you’re retiring.  Sure, you know what you’re retiring from, but what are you retiring to?  Our parents’ generation maydownload (1) have said, “When I retire, I’ll never work again.”  But today’s retirees are striving for more of a balance.  Most people are happiest when they find the perfect balance between purpose and pleasure.  Ironically, our pleasure (or leisure time) draws its meaning from work.  For instance, we all know someone who can’t wait to hit the golf course on the weekend.  His tee times are usually earlier than he’s rolling out of bed during the work week.  But golfer beware:  there’s a diminishing law of returns on leisure.  And when we retire, every day will not be a Saturday.  The thing you’re looking to for joy and fun can over time make you grumpy.  Do you really want golf to become your job?

In the past, my clients may have asked “Do I have enough money to retire?”  Or “Have I had enough?”  Now, clients are more apt to ask “Will I have enough to do?”  All of us, whether we’re a multimillionaire or someone who will be living on little more than our social security, will have the exact same amount of time to fill each week—168 hours.  If you don’t have a plan for maximizing your time, the next stage of your life may not be as fulfilling as you had envisioned.

Finding powerful reasons to get up in the morning will be as important in your retirement as funding it.  Don’t confuse leisure with happiness.  People tend to lean on leisure for fulfillment.  But we really can’t be happy without pleasure and purpose.  There are plenty of people who wake up seeking pleasure only to return to bed empty.  Successful retirees do things that they’re curious about.  They do things that bring value to others and meaning to themselves.  They’ve explored the meaning of work in their lives and find a way to make it a part of their retirement.

Two Schools of Retirement Income Planning

My job description is pretty straightforward: Manage your money so that it will last as long as you do. Making that happen, though, isn’t as clear-cut. In my business, there are traditionally two opposing positions about creating retirement income plans. One is guaranteed income, and the other is investing your money. The first, of course, is all about safety. For clients who are risk adverse, guaranteed income might be the better way to go. For those, however, who want to maximize their wealth by seeking a higher possible return, there is the Total Return philosophy. The latter is holding a diversified portfolio* of stocks and bonds with no guarantees on what you will earn. I’m not an all or nothing person. I believe that you can live your best life now and have the quality of life you desire later by integrating both philosophies.

First, let’s define what I mean by guaranteed income. Maybe I shouldn’t call it “guaranteed” because nothing is guaranteed in this life. “Safety-first” may be a better description. Nevertheless, it comprises Social Security, defined benefit pensions, bond ladders, reverse mortgages and possibly income annuities. The objective of a safety-first retirement income planning strategy is to ensure that your monthly expenses–the necessities–will be met whatever the market conditions are. This safety-first strategy may sound appealing to you, but most safe investments do not keep pace with inflation. Prioritizing your goals is the main ingredient of this strategy.

In contrast to this risk-adverse strategy is holding a total return-driven portfolio comprised of the right mix of stocks, bonds and cash. We’re talking about asset allocation which doesn’t guarantee that you won’t ever lose money but may keep the losses palatable. Here the objective is to maximize the likelihood of successfully meeting your overall lifestyle goals and attempting to outpace the ever-rising cost of living. However, designing the best asset allocation model or portfolio can be complex. You need to look at your time horizon and your tolerance to risk. Your mix of stocks and bonds should be determined by the amount of money you need to withdraw from your accounts.

I’ve been helping people retire for nearly 30 years and know that investing during your retirement years is trickier than saving for retirement. Retirees tend to worry that their money is at risk in the stock market, or they’re not being conservative enough. Outliving their money is an even greater worry. However, as you near retirement age, you should be weighing personal concerns with other realities that you may not have considered. For instance, we’re living longer. It’s not unusual now for retirement to last 30, even 35 years. Also, the cost of living continues to rise. Factoring in an average historical inflation of 3%, your retirement income needs may triple over a 30-year retirement! If you’re 80 years old, I doubt you want to go back to work to support your lifestyle.

Balancing all these factors can be challenging. For sure, you don’t want to be financially teetering in your retirement. That’s why I advocate for using both schools of thought in creating retirement plans. Guaranteed income acts as an insurance to cover your monthly expenses, and a return-driven portfolio, with solid investments, may give you a better opportunity of not only increasing the value of your portfolio but outpacing inflation.

Retirement income planning is a long-term strategy for helping you sustain your lifestyle. It’s really about helping to make sure that you won’t run out of money after you retire and that your money keeps pace with inflation. If you’re five to ten years away from retiring, consider meeting with a fee-based financial planner to design a quality retirement plan that will lay the foundation for your retirement income. You want to be ready for the ordinary costs and the uncertainties in the next stage of your life.

* While there is no assurance that a diversified portfolio will produce better returns than an undiversified portfolio, and it does not assure against market loss, a diversified portfolio may reduce a portfolio’s volatility and potential loss. In reference to general account obligations and guarantees, such as is present with some annuities, the ability for the insurance company to meet these obligations to policyholders are subject to sufficient capital, liquidity, cash flow and other resources of the insurance company. A bond ladder, depending on the types and amount of securities within the ladder, may not ensure adequate diversification of your investment portfolio. This potential lack of diversification may result in heightened volatility of the value of your portfolio.

Retiring On Purpose

I ran into a friend recently who’s a hairdresser. He’s been in the business now for 50 years and has seen it all from the bouffant to the bob. After owning his own salon for as many years, he’s looking to sell it—on one condition: He stays as an employee. Despite being nearly 75, he has no plans to retire. Like he says, “What would I do every day?”

His story’s not that unusual. According to a June 2016 Pew Research Center analysis of employment data from the federal Bureau of Labor Statistics, more older Americans – those ages 65 and older – are working than at any time since the turn of the century, and today’s older workers are spending more time on the job than did their peers in previous years.

This is a new era of retirement revolution. Pensions and corporate stewardship have gone the way of the dinosaur. For some, not working isn’t an option; however, many are choosing to stay in the workforce—and thriving. As someone who’s been helping people retire for the past 25 years, I’ve witnessed the change in attitudes first-hand about retirement. Today I’d be negligent if I planned a client’s retirement assuming that he or she will be leaving the workforce at age 65. As a financial planner, I must get a sense of my client’s true age. By that, I mean his biological age, not his chronological age. For instance, I may have a client who’s 62, but he feels more like 50. He’ll have no intention of retiring in a few years. Like my hairdresser friend, he refuses to be defined by his age.

For me, the planning has evolved from retiring to retiring on purpose. We’re living longer, and we want to stay relevant. If you’re 5 to 10 years out from retiring, finding a reason to get up in the morning will be as important as the financial planning. Think about it: What if every day was a Saturday? Sure, the first several might seem blissful with days spent on the golf course or shopping at Target, but after a while, you’d probably get bored. Carlos Santana, the famous guitarist said, “The only thing that has ever made me feel old is those few times where I allow myself to be predictable. Routine is death.”

Besides keeping you alive (That’s true. Oregon State University found that people who continue to work past 65 have an 11% lower chance of death from all causes), the benefits of working into an older age are numerous. Of course, there are the financial benefits. The more years you work, the less money you’ll need take out of your retirement accounts. And you can delay taking your Social Security. For each year you delay between the ages of 62 and 70, your benefits grow by 8% annually.

The mental benefits are just as important. Working longer keeps your mind sharp. Like the saying goes, “Use it or lose it.” It also keeps you connected to other people, decreasing the chance of isolation. Moreover, and perhaps most important, working can give you a purpose, a sense of identity, a reason for getting up in the morning.

If you still need a little inspiration or motivation to retire on purpose, just look to some of these stars in their 70s: Helen Mirren, Robert DeNiro, Betty White, Morgan Freeman, Dick Van Dyke, Al Pacino, Mick Jagger. Like Mick said, “How Can I Stop?”

Did You Miss the “Trump Bump?”

Okay, admit it. Whether you’re an ardent supporter or never-Trumper, weren’t you a little nervous Donald Trump’s victory would cause the markets to crash? My clients on both sides of the spectrum were anxious. I even have a friend, who’s an avid Trump supporter, call me and ask if it was too risky to get back into the market.

As we all know, markets hate uncertainty, and on election night, futures dropped like a rock. It was scary, very scary. I happened to be at a mutual fund seminar on election night, and the speaker, who’s a fund manager, didn’t sleep a wink the night before. Even professionals were afraid! But the next morning, something short of amazing happened: The market rebounded and continued to do so through the end of the year. The Dow Jones Industrial Average shot up 1,500 points. Since then, however, the excitement has dissipated, and the markets have been flat.

The question going forward is, “What will happen to the markets and the economy now that Donald Trump has been inaugurated as our 45th president?” No one really knows, keeping in mind a caveat that presidents have a limited impact on the economy. One main reason is our Constitution grants the power of fiscal responsibility to Congress, not the president. The Federal Reserve System, a quasi-government entity, may have more power over the economy than either Congress or the president. The Fed is responsible for many key aspects of the economy such as monetary policy, economic stability and supervising and regulating banks. And then there is the economy itself. The U.S. Gross Domestic Product (GDP) is around $18 trillion which covers a multitude of financial sectors and is often driven by consumer confidence; that is, people’s optimism in buying things. (Seventy percent of our economy’s activity is consumer spending). As you can see, managing the economy through government entities is disparate and complex, and a successful economy isn’t exclusively dependent on one branch of our government.

The stock market, a leading economic indicator, reflects and digests all this information and adjusts accordingly. For instance, an up market usually means good times are ahead, and a down market often precedes a recession. It is a separate entity from the political landscape, and the general trend is upwards with, of course, some down and flat periods, too. The chart below tracks the growth of a dollar invested in the S&P 500 from January 1926 through June 2016.
graph1
You can see that the general trend has been up no matter who was president at the time.

Like a baseball manager who often gets the blame or credit for his team’s wins and losses, a president gets the blame or credit for the economy and stock market. But betting your hard-earned savings on how the market will react to Trump occupying the White House is fool’s gold. Back in 2009, many people got out of the stock market because they thought President Obama was going to ruin the economy, and the stock market would never recover. What more do I need to say?

Retirement is an Artificial Finish Line

I received the following alert on my phone from the New York Times this past weekend: “Today’s women are much more likely to work into their 60s and 70s often full-time. And they’re doing it because they enjoy it.”

This may not mean much to you, but as a financial advisor who’s been helping people retire throughout most of my career, I appreciated the notice. It reaffirmed what I already know: Retirement is an artificial finish line.

Women and men are discovering that retirement is not a natural life transition. It’s an idea that’s been inflicted upon us by corporations and society. We’ve been indoctrinated into thinking that when you turn 65, it’s time to punch out and live a life of leisure. This may have worked for the previous generation, but that mindset is no longer sustainable. Pensions and institutional stewardship have gone the way of the dinosaur, and today more than ever we have to assume control over our own retirement planning.

Retiring is about more than just having enough money, though. It’s a major life transition that many people struggle with, and the struggle often has more to do with a static lifestyle than not receiving a regular paycheck.

Think about it: No one teaches us how to retire. I really don’t know of any retirement training classes being offered. On the other hand, retirement planning is a service that’s plentiful. But that’s more about funding your retirement; it’s not about creating a vision of what you want the rest of your life to look like. In fact, finding powerful reasons to get up in the morning during retirement will be as important as the financial planning.

This past week, Aretha Franklin announced that she’s retiring. In a statement she said, “I’m not going to go anywhere and just sit down and do nothing. That wouldn’t be good, either.” Well, if it’s not good for Aretha, it’s not good for you, either. What Aretha is really aiming for is a balance. A balance between vocation and vacation. That’s what we should all aim for to enjoy a successful retirement. After all, I don’t think any of us want to withdraw completely from the track of relevance.

To achieve a healthy balance between vocation and vacation requires planning. Did you know we’re more apt to spend time planning a two-week vacation than we are to spend time planning a possible 30-year retirement? Unlike a vacation, retirement is not the ultimate destination anymore. Stop buying into the destination myth because your life isn’t going to stop moving the day you retire. I’m reminded of that commercial in which everyone is assigned their own personal retirement number. The people in the commercial are so happy to know how much money they’ll need to retire that they write it on a large cardboard sign, attach a stick to it and carry it around with them all day long. Well, if my client’s life means nothing more than a number, then the planning will be about the destination. But let’s not reduce our lives to a story of numbers. Our lives are about more than that.

For most of us, working will no longer be an “all or nothing proposition.” It will be more of a “how much” proposition. In planning for a successful retirement, one with a balance between vocation and vacation, we need to start asking ourselves questions beyond money. How will you invest in yourself and your time?

So, You Want to be a Real Estate Tycoon

A client of mine recently inherited some money. She’s happy with her investments but has been itching to buy a real estate investment property. An old friend of hers, who is a real estate agent, found her a newer property close to a prestigious medical school. Because medical residents need a place to live for several years, it almost seemed like a no-brainer; however, I became skeptical when the real estate agent told my client that she would realize a 13% return on her investment (ROI).

Besides the outlandish ROI quoted by her agent, my other concerns were that my client had never owned any property, not even her own home, and the unit she was considering purchasing was in her hometown, several thousand miles away from where she lives now. I have to admit, though, that the property was very appealing and sounded like a good investment to me—until I saw the numbers.

By “the numbers,” I’m referring to a spreadsheet created by her accountant that looked at this piece of property as a business plan rather than the beautiful home that it is. And boy, did the numbers tell a different story! Her accountant considered all the expenses such as loan service, property taxes and management fees and then compared it to the potential income. After all was said and done, her ROI was not 13%, but 2%. What’s more, the business plan had projected only $250 each year for home repairs and upkeep. As any homeowner knows, maintaining a home is very expensive. I had to shell out $700 right before the holidays for just minor repairs on my own home.

My client also consulted another friend who is a very successful real estate developer. He told her, “You live too far away, and the numbers are telling you not to buy this property. Never fall in love with anything that can’t love you back.” (I love that last piece of advice)! He also told her to keep looking for property close to where she lives and be patient. “Wait for a good deal because you make money on property when you purchase it for the right price.”

But numbers don’t always tell the whole story of people’s dreams, desires or other advisors, for that matter. In the end, my client consulted with a very successful and astute businessman–her father. He felt that the property had better than average appreciation potential because in that particular metropolitan area, people are migrating back from the suburbs to the city. Essentially, they are sick of spending their valuable time in traffic. Her father also pointed out that the property is in proximity to the headquarters of several very large corporate headquarters, and she may get $500- 1,000 more each month in rent. But, ultimately, what it came down to is my client said she needed something new in her life and starting a new business would offer that.

Regardless of the outcome, this story is a good insight to the financial planning process. My clients and I are partners; I’m in it with them for the long haul. I give them what I believe is the best advice for where they are in their life planning and where they want to be. Of course, they are not required to follow my advice, and I don’t take it personally if they don’t. The goal is to have them succeed financially and to help them do it on their own terms.

Trump and Your Investment Portfolio

If you were watching the results on election night, you saw the financial markets react. In the wee small hours of November 9, Dow futures plunged just over 4% while gold and US Treasuries soared. (Markets are funny and tend to be unpredictable in the short term). Since the election, however, the Dow Jones Industrial Average has reached an all-time high.

Sure, Donald Trump is an unconventional politician and has said that he likes to be unpredictable. At this time, we’re not sure what to think or how he’ll govern. Once his cabinet is in place, we’ll have a better idea. Still, you may be thinking that a Trump presidency is “different,” but market volatility is certainly not something that we haven’t seen before. In the past 18 months, we’ve had several instances of investors feeling that “this time it’s different.”

Back in July 2015, the Greek financial crisis dominated the headlines. Investors feared Greece’s problems would spread to the rest of Europe. Then the following month, it was “Black Monday.” When the Chinese government devalued the Yuen, markets went tumbling down. At the beginning of 2016, the Dow Jones Industrial Average got off to its worst start ever dropping 5.5%. And most recently, we had Brexit. Shortly after Britain announced it was exiting from the European Union, the market lost 6% but days later gained back 8%. The bottom line is: Markets, like people, do not like change. But through all this hubbub, U.S. markets continue to hover around historical highs.

Back to your investments. What should you do to protect yourself during a Trump presidency? Nothing. If you’re diversified, you don’t need to sweat the headlines. We can’t predict the future, and we sure as heck can’t predict the markets. That’s why it may be wise to follow the investment ways of some of the world’s wealthiest families and most sophisticated investors. They manage risk through diversification.* This means not weighting one’s investments in with any sector of the economy such as energy or banking, or falling in love with an individual stock such as Apple.

Besides, your investment portfolio isn’t designed for a four-year presidential term. You’re in it for the long run. Investors who stay the course have historically been rewarded. Here’s one thing we can anticipate during the next four years. The markets will go up, and the markets will go down. And parts of your portfolio will do better than other parts. My advice is to stay disciplined, diversified* and focused on the future. If you’re not sure whether you have enough diversification*, a fee-based financial advisor can help you.

*Diversification does not guarantee a profit or protect against a loss.

The Dow Jones Industrial Average is a widely watched index of 30 American stocks thought to represent the pulse of the American economy and markets.

How Will Election 2016 Affect the Stock Market?

With Election Day almost (finally!) here, the most common worry I hear from many of my clients is, “How will the presidential election affect the markets?”

Market volatility before and after the election is a legitimate concern. For sure, this hasn’t been a typical election, and a victory for either party could affect the markets. Markets tend to react to good news and bad news. In the short-term, the stock market can be emotional and illogical. That’s because people drive markets and people– especially when investing their money–can be emotional and illogical.

Dimensional Fund Advisors (DFA) recently published a new study, “Presidential Elections and the Stock Market,” and included the following exhibit of the growth of a dollar invested in the S&P 500* over nine decades (since 1926) and 15 presidencies (from Coolidge to Obama). The study examined the growth of one dollar from 1926 through the end of June 2016. The outcome shows that through Democratic and Republican administrations, the stock market consistently grew, regardless of which party was in power. At times, though, the market was down or flat, too.

graph1

The other part of the study delved into shorter periods of returns previous and subsequent to presidential elections. Again the data showed there to be little or no differences compared to market returns of non-presidential election years. The takeaway: Trying to make an investment decision based on the outcome of an election was unlikely to generate any excess return for an investor. Any positive outcome based on using such a strategy is likely to be the result of random luck. At worst, it can lead to costly mistakes. We can’t predict the economy, and we for sure can’t outguess the markets.

You may be thinking, however, that this time is different. No doubt, with a 24/7 news cycle and nonstop election coverage, it’s easy to get on the roller coaster with the Wall Street hype and media pundits. Turn off your television sets and don’t panic. If history is any guide (and in my opinion, it’s the only guide we have), the outcome of this election should have little impact on the markets in the long-term.

*The S&P 500 Index is an index of 500 of the largest exchange-traded stocks in the US from a broad range of industries whose collective performance mirrors the overall stock market. Investors cannot invest directly in an index.

Disclosure: This information is provided for educational purposes only and should not be considered investment advice or a solicitation to buy or sell this security. This blog contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice. Information was based on sources we deem to be reliable, but we make no representations as to its accuracy. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this article will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.

Do You Want to Retire to a “Happy” Country?

Retirement is habitually pictured and presented as a happy time in our lives. The phrase “the golden years” evokes images of carefree retirees golfing under blue skies or walking along the beach enjoying their newly found free time. I doubt if many of us visualize happy retirees wearing parkas and trudging through slushy streets. Most of us tend to associate a happy retirement with either moving to or vacationing in a sunny climate, certainly not retiring in colder, northern Scandinavian countries where the sun may not even rise for three months during the year.

However, when the United Nations (UN) ranked the 10 happiest countries in the world, 8 out of 10 were located in higher latitudes in the Northern Hemisphere, and five were in Scandinavia. Sweden was ranked #10 and Denmark was #1. (Sweden, by the way, is the best country in which to grow old). The two exceptions to the colder climates were Australia and New Zealand. The United States ranked 13th overall.

What makes these countries happy is multifactorial (and blue skies don’t seem to matter). The UN considered countries based on dynamics such as equality, per capita GDP, social support, life expectancy, perceptions of corruption, individual liberties and how citizens rate their own lives within their home country. Many of the top 10 share certain traits like generous social benefits including health care and education. The countries also are electoral democracies where civil rights are abundant and revered. Other traits are small populations and ethnic homogeneity.

Some economists think “happy” is too touchy-feely to define, so the Legatum Institute, a London-based nonpartisan think tank, set out to rank the happiest countries in the world through the creation of a prosperity index. Each country is ranked on 89 variables sorted into eight subsections: economy, entrepreneurship, governance, education, health, safety, personal freedom and social capital. And once again the Scandinavian countries of Denmark, Finland and Sweden led the pack equally with Switzerland and the Netherlands close behind.

In addition to reasons previous stated, the Legatum research found another important “happiness” factor which is key: the fostering of entrepreneurship and opportunity. Legatum’s researchers concluded that a country’s ranking in this area is the clearest proxy of its overall ranking in the index. This translates to low business startup costs, lots of cellphones, plenty of secure internet servers, a history of high R&D spending and the perception that working hard gets you ahead. Wow! To me, these countries sound like a Bernie Sander’s pipe dream.

Good luck, though, if you want to retire to any of these “happy” cold climate countries. Most are homogeneous and discourage immigration because they don’t want to pay healthcare for older U.S. retirees. I know this because I had a retired client whose daughter and son-in-law moved to Australia, one of the happiest countries. My client wanted to move with them but could not because Australia did not want to pick up her healthcare tab.

Regardless if you live in a cold climate country or warm climate country, we know our happiness is much more than our day-to-day weather or having prosperity. In my profession, I’ve seen people with a lot of money live in lack and people with little money live in abundance. Happiness is ultimately about enjoying good health. After all, “health is wealth.” It’s having independence and being able to take care of yourself. I think we’d all agree, though, whether we’re donning snow boots or flip flops today, that happiness is as simple as having good times with your friends and family. In my next blog, I will discuss countries which welcome American retirees. Hint: the weather is warmer, and your dollar will stretch further!

Is a Reverse Mortgage Right for You?

Are you worried that you’ll run out of money during your lifetime? Are you uneasy about the flat stock market and low interest rates? Would you like a source of guaranteed retirement income in addition to your Social Security benefit and pension? If you answered “yes” to any of these questions, a reverse mortgage is an option that may be suitable for you.

Your home is often your most valuable asset, but until recently, it was an illiquid asset (an asset that is difficult to sell because of its expense, lack of interested buyers or some other reason) and provided you with money only after it was sold. A reverse mortgage helps tackle this issue. Simply, a reverse mortgage allows older homeowners to convert the equity in their primary residence into a liquid asset, be it a stream of income, lump sum or for deferred use. No repayment of the mortgage (principal or interest) is required until the borrower dies or the home is sold. Cash accessed through a reverse mortgage is tax-free and does not impact regular Social Security and Medicare benefits, although it may affect eligibility for other government programs such as Medicaid.

To be eligible for a reverse mortgage, you must be at least 62 years old and must either own the home outright or use the proceeds of the reverse mortgage to pay off the balance of the existing mortgage. You retain ownership of the home, are responsible for its maintenance and continue to pay your property taxes and insurance.

Here’s a simple reverse mortgage example for a 65-year old couple. Let’s say they own a home valued at $250,000 and have completely paid it off. If they choose monthly lifetime payments, they would receive about $672 per month or $8,065 annually. Again, this is tax-free income.

Another option is to defer receiving any income and receiving interest on the amount they borrowed. If that couple did so, based on current interest rates, their account would be worth $193,500 in 10 years. This option would be suitable for someone who does not need immediate income but wants some assurance that there will be income for them in the future.

Reverse mortgages are complex financial instruments, and you must carefully weigh the pros and cons before applying for one. Below is a list of pros and cons from Investopedia, the world’s leading source of financial content on the web.

Pros
• You can often choose how the cash is paid to you: a single lump sum, a regular monthly cash advance, a line of credit where you decide when and how much of your available cash is paid to you, or a combination of these methods.
• Regardless of how the cash is paid out, you normally don’t have to pay anything back as long as you (or any co-owners) live in the home as a principal residence.
• There is no required minimum income to qualify (because you don’t have to make monthly repayments).
• If you receive more payments than your home is worth (i.e., you “outlive” the loan), you will not owe more than the value of the home, according to the Federal Trade Commission.
• Cash advances are typically non-taxable.
• You maintain the title to the home (you remain the owner).
• If you have a federally-insured Home Equity Conversion Mortgage (HECM), you can live in a nursing home for up to 12 months before the loan becomes due.
• Cash advances typically do not affect your Social Security or Medicare benefits.
• After the home is sold and the lender fees are paid, any equity left in the home goes to you or your heirs.

Cons
• You must be at least 62 to qualify.
• You must go through (and pay for) mandatory mortgage counseling.
• Loan origination fees and closing costs can be expensive (these fees can be rolled into the loan and financed).
• You may be charged monthly servicing fees during the term of the mortgage.
• Most reverse mortgages are variable interest rate loans tied to short-term indexes.
• Your debt increases over time as interest is added to the loan balance.
• You cannot deduct the interest until the loan is paid off.
• The loan can become due if you fail to pay taxes, homeowner’s insurance or other expenses.
• There are limits on how big a mortgage you can get, and how much you can borrow during the first year.
• Reverse mortgages use up equity in your home, leaving you and your heirs with fewer assets.

Before exploring a reverse mortgage, you need to ask yourself, “How much home equity do I have?” If the answer is “not much,” then you’d want to look into other options. However, if you’re of the right age without a lot of cash flows and sitting on substantial home equity, a reverse mortgage can be a sweet deal.

If you think you may need access to your equity, talk to a housing counselor or a trusted financial advisor sooner rather than later. A good financial plan created by an advisor keeps you from making hasty financial decisions in an emergency and is designed to give you options–like a reverse mortgage–in your retirement.