You may recall Norman and Ethel as leading characters of the 1981 movie “On Golden Pond”. If I can borrow their names for our discussion here, Norman is 78, Ethel is 77, and they are both enjoying good health. What's looming on their horizon now is the financial stress of being house-rich cash-poor. Left on auto-pilot they will run out of money in six or seven years! This poses the question, "How can they arrange and guarantee an income to confidently last as long as they do?"
Norman and Ethel want to remain in their home as long as possible. Another property they own is vital for family reasons. If they sold a property, they could invest the proceeds to support ongoing income (see Life Income Mandates). Since they don't want to sell the properties, their investment assets are gradually shrinking and may be gone in the next six to seven years.
Our discussion of house-rich cash-poor must focus on how to secure lasting income and protect this couple's ongoing lifestyle needs.
OPTIONS TO SUPPORT LIFE INCOME
Look at the following options, and be aware of the feelings you may have on each of these. Which options would you prefer over others? Which might you recommend if Norman and Ethel were your parents or dear friends?
- Sell their home and invest for strategic life-income.
- Get a reverse mortgage, investing proceeds for income.
- Ask their children now to contribute to their living expenses.
- Borrow to increase investment portfolio for strategic income.
- Draw on home-equity line-of-credit (HELOC) for spending.
- Use HELOC to get Life Annuities: guarantee low-tax life-income.
- Pull income from existing life/health insurance contracts.
- Consider a Sell N Stay approach that is becoming popular (http://sellnstay.com/)
How do you feel about having such options above? .. Will you need help to consider these in more detail? .. Which are most suitable, or what combination could best help you, now and long term, to ease worries of being house-rich cash-poor? .. Can you brightly highlight or circle a couple or few of these that might offer especially strong options for Norman and Ethel (and family) to ensure their income never ends?
EFFECTIVENESS IN SUSTAINING LIFE INCOME
With further consideration we also realize:
i) They’re happiest staying in their own home on Golden Pond.
ii) Reverse mortgage implies significant fees, %rates, investment decisions.
iii) Children have their own needs today as well as securing their retirement.
iv) Norman and Ethel already have a strategic income plan aimed near 6%.
v) HELOC offers fair costs, flexibility, yet no tax advantage; bank may close it.
vi) Life Annuity has fair costs, enormous tax advantage, lifelong guarantee.
vii) Insurance contracts can help if they were already in place.
IF A JET IS RUNNING LOW ON FUEL -- AUTO-PILOT IS NOT A LASTING OPTION.
HOUSE-RICH CASH-POOR OPTIONS (V) & (VI)
Norman and Ethel decide it is worth exploring the options to use home equity as a source of supplemental income for life. Some of the details they can consider include:
v) They may arrange a Home Equity Line of Credit (eg $150,000). Let’s say they draw $700/month (plus amount owing for interest) to supplement current spending and reduce the draw from current investments. This “income” is not taxable, nor is the interest tax-deductible. If their needs rise or fall, they may easily adjust their income. Yet assuming this is an interest-only loan they will pay increasing costs to service this loan, …for life or until they sell property and pay off the loan. As time goes on, they have to keep increasing the income-draw to net $700 monthly after paying loan-costs. A further concern arises if Norman or Ethel die because a bank can generally make a survivor re-apply to keep the loan …which may fail because there’s no direct trail from the HELOC Income to servicing its interest charges. If Norman died, Ethel could lose the line of credit and be forced to sell the house.
vi) Norman and Ethel can use the bank’s line of credit (eg $150,000) to arrange Life Pay-Out Annuities. When Life Annuities are put in place, they are contractually guaranteed for life – even if a person lives to 150. I recommend a clause guaranteeing payment to age 90 if death were to occur sooner. With Norman and Ethel today* we can guarantee near $1100/month income (1/10th of this is taxable). Subtract $500 monthly interest* on the line of credit (until they sell a property and clear the loan) also noting tax-deduction for the investment loan. When all is complete (including tax-saving from reducing Norman’s draw from self-directed pension) other investments will last longer, also reducing tax. Norman and Ethel have created a new source of income that increases their financial capacity between $700 and $1,000 per month after-tax. And if one of them passes away the survivor has guaranteed income to support the HELOC if it's still needed.
As seniors, we or our family members may live long enough to spend our last dollar and deplete our investments. We need an income that can confidently sustain us and our loved ones. Each person's situation is unique. Each one needs specific and professional care to ensure the solutions best fit the personal values and needs. Could we become "House-rich cash-poor"? ... Above are some of the strategies to sustain income and independence for life.
It is increasingly vital in our society today for seniors and their families to align wealth with personal comfort and lasting security. Today's families who find themselves to be house-rich cash-poor, cannot be safely left on auto-pilot but need strategies that will assure lifelong income as well as flexibility for emergent needs along life’s journey.* Story and discussion offered above are for general illustration of seniors' income strategies. This does not guarantee, warrant, or constitute any kind of offer of financial program, product, or advice. Life Pay-Out Annuity income is based on issuer, interest rates, and mortality credits on the date of purchase; borrowing costs change with frequency; tax considerations vary by country and region. Professional advice is imperative to assure care and stewardship of any such plan and its results. Opinions expressed belong to the author, and results hinge entirely on suitability of the planning and monitoring of such plans. Related resources on Retirement Income Strategies: at MoneySense http://www.moneysense.ca/retire/the-7-new-retirement-strategies, also at ThistleCreek http://thistlecreekhealthcare.ca/blog/ and at http://thistlecreekhealthcare.ca/blog/a-lifetime-of-wealth-in-senior-years/ and widely on demographics of aging and life-long income security. On this site (here) and elsewhere on the web see more on "Life Income Mandates" and "Life Horizons Analysis" to align wealth with life's needs as we or our family members proceed through senior years. Access learning modules through Home Page and Registration. Amazon or Kindle: “A Lifetime Of Wealth — And How Not To Lose It.” “Subscribe” on this page to receive upcoming insights and updates. Brian Weatherdon, MA CFP CLU CPCA MDRT