Retirement should be a time when you can kick back and smell the roses. But for many retirees, managing savings and benefits is a full-time job, and not an easy job, either. Poor choices could cost you your home, jeopardize your health care, or leave you without enough money to pay the bills in your later years.
Con artists thrive on confusion, and as we reported last November, seniors are a prime target for financial scams (see Protect Yourself, Loved Ones From Financial Abuse of the Elderly). More than half of all certified financial planners have worked with a senior who has been the victim of unfair, deceptive or abusive practices, according to a recent survey by the Certified Financial Planners Board of Standards. (See ways adult children can help parents spot scams.)
But even legitimate -- and often appropriate -- financial products come with drawbacks that aren't always explained in the marketing pitches. We've focused on three products that are heavily marketed to retirees: reverse mortgages, long-term-care insurance and annuities. Unlike a faulty lawn mower, they can't be returned if you're unhappy with their performance. Before you buy, you need to understand the risks.
What do Robert Wagner, Pat Boone, Fred Thompson and Henry Winkler have in common? If you've watched TV lately, you probably know the answer: They are all celebrity spokesmen for companies that offer reverse mortgages. Once you get over the shock of seeing the Fonz with gray hair, it's hard not to be intrigued. Life without mortgage payments! A government-insured loan! The retirement you deserve!
Like a traditional mortgage, a reverse mortgage allows you to borrow against your home equity. You don't have to repay the loan as long as you remain in your home. You must be 62 or older to qualify, and your home must be your primary residence. If you need extra income to supplement your retirement savings, a reverse mortgage may seem like the answer to your prayers. But the TV ads don't say much about the downsides.
You could run out of money. You can take your payout as a line of credit, monthly payments or a lump sum. In recent years, the majority of borrowers have opted for a lump sum, according to a recent report from the Consumer Financial Protection Bureau.
Peter Bell, president of the National Reverse Mortgage Lenders Association, says there's no evidence that lump-sum borrowers are spending the money frivolously. Many younger borrowers are using reverse mortgages to pay off their existing mortgages, which frees up money for other purposes, says Bell. But borrowers who withdraw all of their available home equity upfront "will have fewer resources to draw upon to pay for everyday and major expenses later in life," the CFPB says.
And the younger borrowers are when they tap their home equity, the greater the risk they'll run out of money. According to the CFPB report, in 2011, nearly half of borrowers were in their sixties; in 1990, less than 20% were.
Reverse mortgages are expensive. Although fees have come down, reverse mortgages are still a costly source of cash. The most common reverse mortgage, the federally insured Home Equity Conversion Mortgage (HECM), charges an initial 2% insurance premium on the full value of the home, which guarantees that you will receive expected loan advances. That means you would pay a premium of $8,000 on a home valued at $400,000, no matter how much you borrow. Lenders that offer HECM loans are also allowed to charge an origination fee ranging from $2,500 to $6,000, depending on the appraised value of your home. And you'll pay closing costs that typically include an appraisal, title search and other fees, along with servicing fees of up to $35 a month.
The HECM Saver, available since 2010, charges an initial insurance premium of just 0.01% of the home's value. However, the amount you can borrow is much lower than it is for the standard HECM, and the interest rate is higher.
Because fees are so high, you should explore other sources of funds before taking out a reverse mortgage, says Susanna Montezemolo, vice-president of federal affairs for the Center for Responsible Lending, in Washington, D.C. A traditional cash-out refinancing or home equity line of credit is less costly, although retirees who are living on a fixed income may have trouble meeting post-2008 lending standards. Tapping your savings is another alternative. "I know some people are loath to go into retirement savings, but their home is their savings as well," Montezemolo says.
You could lose your home. Even though you don't have to make payments on a reverse mortgage, you're still responsible for homeowners insurance, property taxes and maintenance. As of last February, more than 9% of reverse-mortgage borrowers were at risk of foreclosure because they had fallen behind on tax and insurance bills, reports the CFPB.
Another problem: Because the amount you're eligible to borrow is based on your age or, for married couples, the age of the younger spouse, some couples remove the younger spouse from the deed to the home before applying for a reverse mortgage. If the spouse whose name is on the deed dies or moves into a nursing home, the loan will come due, forcing the younger spouse to pay off the loan or sell the house.