House rich, cash poor? When a reverse mortgage can make sense

Here is my latest MoneySense blog on this subject.

Click on the link above if you want to see the links, but for continuity’s sake I’ve inserted the the text below:

While I personally never expect I’ll need to use a reverse mortgage, the topic keeps coming up. Most recently CBC Lang & O’Leary Exchange host Amanda Lang interviewed MoneySense’s own Bruce Sellery on income generation option. A couple weeks before that, it came up over dinner with a friend.

A reverse mortgage is a loan secured against your house, typically representing up to 50% of its value. As people live longer and house prices rise, it’s becoming an increasingly popular option for seniors who want to stay in their homes while still tapping its equity.

My friend is almost 70, twice divorced, has no heirs and has virtually no savings or employer pensions, except for the government pensions CPP and OAS. These he has already begun to draw from, even though he also continues to work at least part-time. (He’s in sales, so commissions can be sporadic.)

But what he does have, in addition to an average car that’s no longer new, is significant equity in a Toronto townhouse. Whenever we meet, I congratulate him on making for him what was the smartest financial decision of his life. Like most Toronto homeowners who bought more than a decade ago, he’s more than doubled his initial investment.

In effect, he is house rich and cash poor. As he prepares to stop sales work altogether, he’s trying to figure a way to generate a little more income than CPP and OAS will deliver to him. Naturally, the idea of tapping his home for equity appeals to him. This could be done in several ways. If I were him and in the same situation, I wouldn’t go the reverse mortgage route but would downsize. I’d sell and move to a modest condo located on the subway line, enabling me to sell the car and ditch the cost of vehicle ownership. If you don’t need to drive to work because you’re no longer working, that’s a substantial savings. Public transit should suffice most of the time but if you do need to take the odd cab, as I say to another elderly friend, “you can take a lot of cabs for what you pay out each year in car insurance.”

Another downsizing option is to sell the townhouse and leave the big city entirely, finding “twice the house for half the price” somewhere in the country, or a cheaper major city like Montreal or Halifax. Ideally you’d end up with a paid-for rural property, no debt and perhaps $150,000 or $200,000 that could be wisely invested: first to the maximum TFSA limit.

But my friend is very fond of his current house, likes the community and really doesn’t want to move. He’s willing to do what he did when he first bought the home and take in a paying tenant. If ever there were a candidate for a reverse mortgage, it’s him. I told him to research the reverse mortgages online, get hold of P. J. Wade’s book, Reverse Mortgages: Best Friend, Worst Enemy … Your Choice! and find a financial institution or adviser that’s familiar with the topic. The Canadian Home Income Plan (CHIP), which is offered by HomEquity Bank, is the main source of most reverse mortgage products that are available in Canada. You can also speak to your financial institution about other options that may meet your needs.

Remember, I told my friend, a reverse mortgage is exactly that: instead of paying down your interest charges and building home equity, you do the opposite: you’re going more and more in debt, paying higher than normal interest and depleting ever more home equity as time goes on. But you can stay in the home for the rest of your life (health permitting) and if you have no heirs, you may not be concerned about what’s owed on the home when you do die. In the meantime, the extra cash coming in from the reverse mortgage is tax-free, so won’t result in clawbacks of OAS or the Guaranteed Income Supplement.

As Wade puts it, reverse mortgages seem to contradict the old saying that you can’t have your cake and eat it too. In certain situations, such as my friend’s, it seems you can have your home and spin off extra cash from the equity too.

Reimagining Retirement

reimagine-your-retirementThe book pictured I picked up at the recent Write Canada 2014 writer’s conference in Guelph, Ont., the third time in five years I attended that event.

Joyce Li is a project manager and motivational speaker, originally from Hong Kong, now living with her family in Brampton, Ont.  Reimagine Your Retirement is published by Word Alive Press, and is what you might expect from a publisher focused on spiritual writing. Li’s perspective on Retirement is not at all the traditional  “full stop retirement” we think of when we see the ads from the banks and fund companies.

Instead, she views Retirement as a sort of spiritual/vocational halfway house between one’s working years and eternity.  This is not dissimilar to my own view of Findependence or Semi Retirement. In fact, she credits Rick Warren’s The Purpose Driven Life for inspiring her almost a decade ago: she gave six family members copies of Warren’s book, with personalized inscriptions.

Are you haunted by “nagging dreams”?

Li spends time a good chunk of time talking about ”nagging dreams “ that have yet to come true. And who among us does not harbour dreams we’ve not yet been able to manifest in this harsh workaday world and its seeming financial constraints? Li doesn’t make light of the financial side of retirement but seeks a way to reconcile it. And she’s not shy about confessing her own youthful dreams of becoming either a movie star or a pop star.

Spiced liberally with biblical quotes, Li is all about planning: plan the work, work the plan.

In the opening chapters, she reminds us the concept of retirement was non existent in biblical times and throughout most of history.  And whether retirement is  voluntary, involuntary, or delayed, Li doesn’t shy away from the financial side of it. One reality is that “Retirement requires financial support for an unknown time.”

And did you know the bible  has at least 250 verses that discuss money? Interestingly, she says the Bible has “no direct reference to retirement or retirement planning,”  except for one passage in  Numbers 8:23-26.  (“at the age of 50, they must retire from their regular service and work no longer.”)

While she  acknowledges that some plan never to retire, some will partially do so, and some will fully retire to disengage from the workworld altogether, Li’s personal orientation seems strongly oriented to reinvention or reimagination, as the book’s title suggests. This may entail going back to school, or  embarking on a brand new vocation.

The book will find few readers among atheists and agnostics, but will be thought provoking for those who see a spiritual dimension to life, no matter what particular religious affiliation.

A book for writing in

I wouldn’t suggest obtaining a library or ebook version of this book, as Li provides plenty of blanks she encourages one to fill in, with multiple exercises to put self discovery and concrete planning into practice.  She’s all about discovering one’s skills, life gifts, spiritual gifts and passions, then encapsuating what you’re discovered into a personal mission statement that will chart your 20 to 30 years of a reimagined retirement.  She’s a strong believer in the power of visualization, which of course is exactly what I suggest in my own book: drawing a line in the sand and declaring it your Findependence Day, even if it turns out ultimately to be a moving target.

 

 

 

 

How not to prepare for retirement

My latest Financial Independence blog at MoneySense.ca can be found under the above title here.

For convenience, here is the text, with a few minor tweaks at the end:

Despite the steady flow of retirement savings crisis headlines in recent years, it seems many Canadian couples haven’t even discussed the topic with their significant others, let alone started a savings regime.

Last week, RBC reported that 68% of not-yet-retired Canadians 50 or older who participated in its annual retirement poll have yet to discuss their post-career lives with their partners. Eighty-six per cent are reluctant to discuss health issues, 81% don’t want to raise the topic of what happens if one of them dies sooner than anticipated and two-thirds haven’t discussed what they will do together in retirement. And astonishingly, only 36% have discussed how to finance retirement and where they would live once it occurred.

RBC_Retirement_Myths

Retirement preparedness is no better in the United States. Thirty per cent of American workers have less than US$1,000 in savings and investments while three-in-four have less than US$30,000 saved in their retirement accounts, according to data from 2012. Similar to what RBC found, 56% of Americans have not tried to calculate how much they need for retirement. Little wonder the average expected retirement age in that country has risen from 60 in the mid-1990s to 67 today. In other words, many will merely wait for social security to kick in. As it stands, 35% of Americans over 65 rely entirely on social security for their income and 40% of U.S. baby boomers plan to work until they die, according to a 2010 AARP survey.

It’s clear that couples on both sides of the border can do better to prepare for their post-career lives and the first step is talking about it. Do you plan to work part-time or launch your own entrepreneurial venture once you leave your day job? Does your partner hope for the same?

Mark Venning recommends those 55+ plan for extended longevity, not the traditional full-stop retirement. Canadians can now expect to live to almost 82, versus just 57 in 1921, according to the most recent figures from Statistics Canada.

One Alternative to Saving: Early “Six-Feet-Under”

Imagine the daunting prospect of “retiring” at 60 or soon after and having to live another 40 years without a paycheque? As The National Post recently noted, some gerontologists are suggesting Canadians could expect to live to 120 in the near future. Now there’s a scary thought experiment: living 60 years without a paycheque!

The way I see it, those of you without a solid savings plan are either going to have to work a very long time into old age or hope for “Freedom Six Feet Under” before you run out of money. To the people who have saved only $1,000 or $30,000, just how long do you expect that money to last? If this is you, perhaps you should take up skydiving, stop exercising, start smoking and eat nothing but junk food.

Either that, or show this blog to your spouse and start having a serious chat about what your joint retirement looks like. And I can tell you from where I currently sit, it can look great, but only if you get serious about it.

Embracing Change

1838 Mark Venning Low Res copy

Mark Venning, Change Rangers, courtesy Mark Venning

As noted last week in my MoneySense Financial Independence blog, I intend to write a series of posts on the mass migration of almost-retired baby boomers moving from large corporations to free agency.

I recently attended a full-day workshop on this topic put on by Mark Venning of ChangeRangers.com. Venning knows well of what he speaks: He has spent more than a decade and a half working with mature (55+ generally) clients who have migrated from corporate employment to self-employment. A big part of his perspective is extended life expectancy and longevity: he prepares clients to continue working at some level well into their 60s, 70s and even 80s. The slogan on his business card and website is Envision the Promise of Longevity.

Claiming your place at the fire

As I argued on the MoneySense blog, 40 years is a long time to go without a paycheque, which is how long someone leaving the paid workforce might have to plan for if they leave paid employment in their early 60s. Add the type of extended longevity that Venning and others envisage (I’m thinking of Lee Anne Davies and her Agenomics blog, or Moses Znaimer of Zoomer Media), and “retired” boomers need to start preparing for this next great stage of their lives. There are of course many books on this topic: we looked at one last week and another I’m currently reading on my Kindle is Claiming Your Place at the Fire: Living the Second Half of Your Life on Purpose.

Leaving the Corporate Womb

But back to Mark Venning and Change Rangers. I can’t possibly summarize his content in a short blog but suffice it to say that in this economy there are many talented people who are either voluntarily or involuntarily being motivated to consider alternatives to employment in large corporations.  One is self-employment, an option that “more and more people 50+ are exploring,” he says.

Compared to 50 years ago, these mature people are in better physical condition, so can expect an extended lifetime. “They’re living longer than they typically used to so they have to plan for a longer period of time,” he told me in an interview, “This is why the word ‘Retirement’ doesn’t work for me. It’s about longevity planning. My core message is plan for your longevity, not for retirement.”

A Portfolio Career

As I see it, there are at least three ways to go when you decide to set up your own shop. One, you may see this as an opportunity to test out clients (and them you) with a view to possible full-time reemployment down the road. Second, you may decide such a “portfolio career” is a more attractive route at this stage of life: when you think about it, a single “job” means just a single client, which is less secure than having several clients. And of course, you don’t have a traditional “boss,” although being your own boss has challenges of its own. And third, while many choose to start such enterprises tentatively as a one-person shop working from a home office, there’s always the possibility of growing the enterprise down the road so that one day you are an emploYER, rather than an emploYEE. And that in turn offers the potential to sell a business.

Free Agent Nation and other books

As I warned, this blog doesn’t even begin to scratch the surface but for now, I’ll leave you with a few book suggestions from a list Venning hands out. One I just read on the Kindle is Dan Pink’s Free Agent Nation: The Future of Working for Yourself. Another I’ve just begun is Peter Block’s Flawless Consulting: a Guide to Getting Your Expertise Used. And a third I’ve put on hold at the library is Alan Weiss’s Value-Based Fees: How to Charge and Get What You’re Worth.

 

Degrees of Findependence

Long Branch section of Lake Ontario. Photo by J. Chevreau

As my parallel Financial Independence blog at MoneySense.ca shows here, there are degrees of financial independence. For one-stop-shopping purposes for users of this site, I’ve included the blog below:

Degrees of Financial Independence

In researching the web for content clarifying the differences between Retirement and Financial Independence, I came across this May 8, 2014 post by J.D. Roth, of the Get Rich Slowly site.

In his “coming to terms” post, Roth finds the traditional word Retirement carries too much baggage, so he prefers the term I also like: Financial Independence. That’s a fairly common stance among the semi-retired and early retirees who write about this topic: the only difference is few have (as yet) adopted my contraction of Financial Independence: Findependence. The reason I invented that term is that I felt if we are to have a catchy popular alternative to the word Retirement, it should be shorter than the two-word seven-syllable mouthful called Financial Independence. Retirement is one word and three syllables; Findependence is also one word and has only four syllables.

A continuum of financial freedom

But whatever the term you prefer, it’s important to realize there are degrees of Findependence/Retirement, or a continuum. This is a point Roth makes in the article flagged above.  He talks about four types of retirement: the traditional full-stop version that begins (usually) at age 65, Early Retirement (launched usually in one’s mid 50s or early 60s, although there is a genre of Extreme Early Retirement that supposedly begins in one’s 20s or 30s). And finally there’s the concept of multiple Mini-Retirements championed by Tim Ferriss in The 4-Hour Workweek, and which I blogged on earlier this summer.

If you reframe the Retirement discussion as being about Findependence, it’s also possible to describe a similar continuum, just as it’s possible to describe different degrees of financial freedom. Roth notes we all begin life completely dependent on our parents, including financially. At some point, children leave the nest but will depend on an employer and/or financial institutions. Once free of consumer debt, a greater degree of financial freedom is achieved, and this freedom expands once you own a home free and clear: which is why I say the foundation of Financial Independence is a paid-for home. At that point, you are no longer paying a mortgage or paying rent to a landlord, although of course you will still have to pay municipal property taxes and if you’re a condo owner you may be on the hook for ongoing maintenance fees. Beyond that, you’ll still need external sources of income for heating, hydro, roof repairs and all the other expenses that home owners incur. And finally, true Findependence arrives (I call this Findependence Day), when enough money is coming in from multiple passive sources of income (Pensions, investments, etc.) that you no longer need to rely soley on income derived from the single source called an “employer.”

Cadillac vs Chevy retirements

But even then, there’s low-level Findependence and high-level Findependence. You may have saved enough not to have to go to work five days a week but may not be so flush that you can eat in fancy restaurants and travel the world 365 days a year. Most people on the Findependence continuum will be somewhere between the latter luxury Findependence and a barebones one that requires eating in most days and restricting exotic travel to a few weeks a year. If the latter, it’s perfectly logical to continue to work on projects or part-time to fund a few more luxuries and the occasional mega-trip.

 

 

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