This podcast was recorded on Sept. 6, 2016
Alison Southwick: The next question comes from Bill. He writes: "My father-in-law, who's now 81, provided for his family for years and didn't save enough for retirement. He has less than $10,000 in savings. He does get Social Security. His wife was never employed, so she doesn't collect Social Security. One of his daughters convinced him to do a reverse mortgage with some more home equity available when needed.
"Generally speaking, what are the options for him to make his cash last as long as possible, and are there any solid ways he can help himself or we can help him? He's a prideful man and doesn't like the idea of us helping, so we're a bit stuck. So far we're doing small things to alleviate expenses, like paying for his cellphone plan."
All right, Joe...
Robert Brokamp: That's a tough situation.
Southwick: ...this is like the worst nightmare, right?
Joe Perna: Yeah.
Southwick: You're not going back to work. You are running out of money.
Perna: And so the cash position -- you really don't want to be putting those funds at risk in the market. You really want to be keeping that in cash or maybe CDs. Maybe short-term bonds. But because you're going to be requiring those funds to be paying for your living expenses, to put them at risk and potentially see some volatility in the market is just not a great idea. So I would not be saying to put that money to work. I would say to keep it in cash for the time being.
One thing I do want to point out is you mentioned that your mother-in-law didn't work and so she's not eligible to collect Social Security. And while that is the case, she does have the ability to pick up a spousal Social Security benefit on her husband. She's eligible to receive up to half of his benefit at full retirement age, so if he's making $30,000 in Social Security income, she could be eligible to get $15,000. If that's not something that you guys have looked into, you certainly want to do that with the family. That's an additional source of income that will be really attractive to the family.
Brokamp: And a reverse mortgage probably makes sense for them, right?
Perna: Yes, I think so. You might know a little bit more about the reverse mortgage, so you might want to speak to people on that.
Brokamp: It's a way of using your home equity. If you're 62 or older, you take out the loan. It can be a monthly check. It can be a lump sum. It can be a line of credit. And you don't have to pay it back as long as you live in the house. So, if he plans to live there forever, it's a good idea. He won't have to pay it back...
Southwick: Or his wife?
Brokamp: Or his wife. And if the loan ever grows to be worth [more] than the value of the house, you can't come after the estate. The bank can only get the value of the house once it's time to pay off the loan. I look at it as a big, fat emergency fund for retirees. But in this situation, it sounds like he is in an emergency, and a reverse mortgage is probably a smart thing to do.
Perna: It's an underutilized thing. People don't realize that they can tap that equity. It's definitely a backdrop or a backstop on someone's retirement income. If they haven't saved diligently enough, it is a great play. It's a great source of income.
Southwick: Are there any shysters out there in the reverse mortgage industry that you need to look out for?
Brokamp: You definitely have to be careful with them. They have high up-front costs. Those have come down significantly. The best sources for information about reverse mortgages is HUD (Housing and Urban Development), and AARP has good resources, too, but you definitely want to make sure you're getting a good deal from it.
The only other thing I would say is many cities, states, and counties have resources for low-income elderly, so you would definitely want to see what's available. There can be breaks on property taxes and maybe other services that can be provided.
Sean Gates: And for all you listeners out there, that's a warning to make sure that when you're doing your planning, pay attention to your family, because they're money-grubbing people.
Southwick: Oh, no! It's a lesson like when you're in an airplane and it starts going down, you need to put your air mask on yourself first, and then help those around you, because it sounds like his father-in-law was very generous and probably didn't worry about himself as much as he maybe should have.