By Daniel J Turner NMLS#1016716 Geneva Financial LLC NMLS#42056; American College RICP Candidate Class of 2020

Copyright 2020 All rights reserved. Use by written authorization only.

 

 

The quandary is the balance to find consistent monthly income to meet expenses with the concern regarding spending retirement income capital to purchase an income annuity cash flow stream for life.

For a variety of reasons, many Retiree’s are reluctant to surrender the use of investment resources to purchase an income stream annuity.

 

The imperative point is for the Financial Planner to recognize the reverse mortgage was the beginning solution; not the last solution.

 

“Flooring” (essentials v. Discretionary) model works like this (the “Bucket” strategy is not that dissimilar):

Jane and Joe need $8,000/month of guaranteed income to cover basic necessities (mortgage/credit card payments, utilities, food, insurance, property taxes, etc.). Their

Social Security would total $3,700/mo;

Defined benefit income………2,400/mo

Total monthly income flow…6,100/mo

<shortage>……………………….-1,900/mo

 

They have aggregate saved investments of $700,000.00 (mostly qualified) funds.

 

To purchase an immediate annuity to cover the remaining floor amount would place a serious “dent” in their remaining investments.

 

***For this example, assume they have or do not have an established emergency fund.

 

They also own a home. It has a mortgage of $1,200/mo (P&I) with 16 yrs remaining to pay off.

 

Financial Planning with a Reverse Mortgage

This is the capacity for “Reverse Mortgage problem solving” that has escaped the financial planning world for DECADES…

1. Obtain a Reverse FHA HECM HELOC. This eliminates the required mortgage payment that is still 60% (of useless) INTEREST per month. This reduces the shortage to $1,900-$1,200=$-700/mo.

2. Use the HECM Line of Credit to provide the equity to fund a “Joint-Life Tenure” Income stream; a guaranteed monthly income stream to cover the $700.00/mo shortage. Upon the first death the payout does NOT reduce to the Surviving Spouse. It remains the same.

3. The HELOC (unused) balance will continue to add new equity to the LOC for LIFE. In the future, more equity may be converted to income stream at no cost.

 

The TENURE income stream is tax free.

The TENURE income stream is borrowed equity and does not get reported nor does it trigger income taxes against social security income.

The TENURE income stream may be increased, reduced, suspended at ANY TIME by the Client at no cost; at no repercussion.

Should Long term nursing or convalescent care become relevant? The TENURE monthly income may be immediately suspended and the equity being used to supply the payout is reserved as equity in the home instead of feeding the medicaid spend down rules.

Using the home equity vs. using the investment resources does not trigger taxes. It won’t be added into the 1099 D list that is taxed annually, and won’t compel more taxes against Social Security. It is also not subject to RMD circumstances.

The Line of Credit and the TENURE income stream are guaranteed for up to 150 YEARS from the date of birth of the first Borrower.

Line of Credit is Federally Insured for the benefit of the CLIENTS and cannot be suspended, reduced, or cancelled for any reason (other than mis- or malfeasance). IOW, Funding a meth lab is not a good investment choice.

The portfolio maintains its full value and may be invested to meet other relevant objectives without needing to reserve for future income needs.

With the HELOC balance being ‘available’ upon demand at any time (in spite of being annuitized) it is STILL capable and adequate of acting as an “emergency fund”. If an emergency fund is being used? It may be converted to HELOC value, portfolio management, or it may be split to do both or more things.

The rate of return on most emergency fund accounts are under 1%; the HELOC value growth rate is currently over 3% tax free, no surrender charges or fees.

 

To recap- the FHA HECM HELOC in this example was valuable because it performed 3 tasks simultaneously, and is reversible, and changeable, and can be increased in value, and did all of these things without reducing portfolio values or triggering income taxes.

 

Please leave your notes below. If you have a better technique with similar outcomes? I’d really want to know about it.

 

#RICP #CFP #CPA #CHFP #LUTCF #CLU #CEP #Retirementincomestrategy #Financialplanning #Flooringincomestrategy