Some HiLites of the Retirement Research Consortium Annual Meeting

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Some HiLites of the Retirement Research Consortium Annual Meeting

Post by bobcat2 » Thu Aug 13, 2015 11:22 am

The Retirement Research Consortium (RRC)17th Annual Meeting was held in Washington, DC earlier this month. I have attended about half of the meetings and IMO this was one of the two best – the other being the 2012 meeting.

Here are some takeaways from this year’s RRC meeting that particularly struck me.

- Exponential growth bias is a significant behavioral problem in saving for retirement.
Link viewtopic.php?f=10&t=171579&p=2587810&h ... s#p2587810

- Nudging behavior – One paper investigated that in setting DC retirement defaults, which workers are most affected by the default settings. The short answer is low income individuals are more affected by defaults than high income individuals. However, there is more to the story than the short answer.
Link - viewtopic.php?f=10&t=171579&p=2590028&h ... *#p2590028

- Any changes made to SS, Medicare, or Medicaid affect all three programs. Changes in any of these programs cannot be thought of in isolation. The programs are simply too interconnected.
Link - viewtopic.php?f=10&t=171579&p=2592112&h ... d#p2592112

- Are American households well prepared for retirement?
It depends. It particularly depends on kids and saving, on mortgage and saving, on when they take Social Security, whether they annuitize beyond Social Security, and how they account for longevity and income during retirement.
Link -viewtopic.php?f=10&t=171579&p=2593511&h ... y#p2593511

- Duration matching of ST and LT TIPS bond funds can reasonably replicate a TIPS ladder.
Link -viewtopic.php?f=10&t=171579&p=2595854&h ... n#p2595854

- All home owners as they approach retirement should consider a reverse mortgage line of credit.
Link -viewtopic.php?f=10&t=171579&p=2598028&h ... e#p2598028

I intend to flesh out the above points in further posts.

Here is a link to presentation summaries and slides. The materials available should grow over time. :)
https://www.nber.org/programs/ag/rrc/rrc2015/

BobK
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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by Broken Man 1999 » Thu Aug 13, 2015 12:29 pm

bobcat2 wrote:The Retirement Research Consortium (RRC)17th Annual Meeting was held in Washington, DC last week. I have attended about half of the meetings and IMO this was one of the two best – the other being the 2012 meeting.

Here are some takeaways from this year’s RRC meeting that particularly struck me.

- Exponential growth bias is a significant behavioral problem in saving for retirement.

- Nudging behavior – One paper investigated that in setting DC retirement defaults, which workers are most affected by the default settings. The short answer is low income individuals are more affected by defaults than high income individuals. However, there is more to the story than the short answer.

- Any changes made to SS, Medicare, or Medicaid affect all three programs. Changes in any of these programs cannot be thought of in isolation. The programs are simply too interconnected.

- Are American households well prepared for retirement?
It depends. It particularly depends on kids and saving, on mortgage and saving, on when they take Social Security, whether they annuitize beyond Social Security, and how they account for longevity and income during retirement.

- Duration matching of ST and LT TIPS bond funds can reasonably replicate a TIPS ladder.

- All home owners as they approach retirement should consider a reverse mortgage line of credit.

I intend to flesh out the above points in further posts.

Here is a link to presentation summaries and slides. The materials available should grow over time. :)
https://www.nber.org/programs/ag/rrc/rrc2015/

BobK
Interesting suggestion for those approaching retirement in considering a reverse mortgage line of credit. Wade Pfau has an article that outlines some value in establishing such a line of credit HERE:
http://www.advisorperspectives.com/arti ... -of-credit

Some of us (myself included) chafe a bit knowing we are over-housed, yet are very comfortable in our neighborhoods amongst long-term neighbors, enjoying steady real estate appreciation, and having low, often "capped" property taxes.

I haven't been able to blast wife out of our house no matter what I have offered: new townhome or condo with completely new furnishings, and I even tried offering a bribe of a Mercedes SUV. She isn't going to move. And our kids are all housed nicely. By the time we pass (hopefully) all the grandkids will be on their own, and our children wouldn't need a large home at that time any more than we do now.

Too much house, truly a first-world problem.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by bobcat2 » Thu Aug 13, 2015 3:14 pm

bobcat2 wrote:The Retirement Research Consortium (RRC)17th Annual Meeting was held in Washington, DC last week. I have attended about half of the meetings and IMO this was one of the two best – the other being the 2012 meeting.

Here are some takeaways from this year’s RRC meeting that particularly struck me.

- Exponential growth bias is a significant behavioral problem in saving for retirement.
Exponential-growth (EG) bias

Individuals frequently exhibit exponential-growth (EG) bias, the tendency to underestimate the exponential growth of an asset’s value over time due to neglecting compound interest, i.e. the interest on the interest.

Example problem – A person is asked how much he will have in 9 years if asset is now worth $100 and grows at 8% per year. The answer is $200, but many people answer $172. That difference is known as EG bias. Over long periods of time this can be a extremely significant bias. Think how big the bias would be in the example if the length of time were 27 years instead of 9 years.

Misunderstanding this compounding effect creates a cognitive barrier to optimal saving. Namely, people get discouraged by underestimating the expected growth in financial assets and give up saving for retirement, because it seems they can’t possibly save enough for a comfortable retirement. A growing body of literature suggests that EG bias is prevalent among many Americans and is correlated with lower levels of wealth accumulation and higher levels of debt.

Link to summary of presentation on EG bias - https://www.nber.org/programs/ag/rrc/rr ... Tasoff.pdf

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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by JDDS » Thu Aug 13, 2015 11:25 pm

Thanks for the post. I'll have to find some time to look more in depth on a couple of these.

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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by IlliniDave » Fri Aug 14, 2015 7:23 am

Interesting stuff.

I'm intending to downsize my home and I don't expect any of my heirs will want it. Seems like if one could find a non-predatory deal on a reverse mortgage (or LOC--I honestly don't know the distinction at this time) it would be a reasonable strategy approaching one's last line of defense.
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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by dodecahedron » Fri Aug 14, 2015 8:55 am

IlliniDave wrote:Interesting stuff.

I'm intending to downsize my home and I don't expect any of my heirs will want it. Seems like if one could find a non-predatory deal on a reverse mortgage (or LOC--I honestly don't know the distinction at this time) it would be a reasonable strategy approaching one's last line of defense.
This is potentially a very attractive form of longevity insurance. If I am understanding how this works, it seems like a reverse HECM might save my heirs (or me) a lot of the time, energy, and stress of selling my home after (or before) I depart this earth. If the balance on the HECM is greater than or equal to the market value of the home, is it correct that my heirs could just turn over the deed and keys to the home and be done with it? Alternatively, can I just do the same if, e.g., I need to move out prior to death (e.g., to assisted living or nursing home)?

I am wondering what the tax aspects of the deal would be in such a case. Could it be considered a sale by me? (and therefore getting the benefit of my $250K exclusion of gain but using my cost basis.) Could it be considered a sale by my estate (in which case, no $250K exclusion but basis would step up to the FMV at time of death)? I am guessing it could be the former if I move out and turn over the deed/keys to the bank prior to death, and the latter if I die and my heirs hand over the deed/keys.

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Reverse Mortgages

Post by Northern Flicker » Fri Aug 14, 2015 1:43 pm

Heirs generally still have to sell the house. As you get payments from the reverse mortgage, a mortgage balance accumulates. The house also may appreciate or depreciate. When the house is sold, heirs get the net after payoff of the mortgage. But if you live a long time, and the mortgage balance grows beyond the home value, the mortgage provider covers the shortfall and there is no proceeds of the sale.

So, how is the actuarial liability covered if it isn't like an immediate annuity where shorter living participants subsidize longer living ones? First, someone has to live a long time for the mortgage balance to be upside down. With a 30-year amortization and eligibility starting at age 60, you have to live past 90 if the house doesn't appreciate at all. Most likely, it will only ever be upside down in a depreciating market, and some were/are after the credit crisis we just had.

Second, reverse mortgages have hefty closing/origination costs. Many elderly folks will at some point find living independently at home difficult and may move in with a relative or to a retirement facility. When the house is sold, the seller gets the net equity, but the hefty loan origination fees are gone. I don't know the crossover point for time of ownership of the house for a reverse mortgage to be a good deal, but I think many are taken out at an older age when finances get tighter, and probably aren't a good deal at that time.

-jalbert

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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by Levett » Fri Aug 14, 2015 1:52 pm

Thanks, Bob.

I, too, would be interested in the rationale for the following:

"All home owners as they approach retirement should consider a reverse mortgage line of credit."

I gather "consider" may be the operative term. I am well into retirement, but willing to listen.

Lev

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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by adamthesmythe » Fri Aug 14, 2015 1:55 pm

> - All home owners as they approach retirement should consider a reverse mortgage line of credit.

While I read that reverse mortgages are less predatory now, I am still unpersuaded.

As I understand it, you still need to (1) live in the house and (2) maintain it. I can see a situation where an older house starts to accumulate expensive maintenance deficits* and becomes uneconomic even with tax abatement. I think in many cases moving to newer, smaller, cheaper, more maintainable housing is a better idea than trying to extract money from a house that is too much house.

This is all dependent on individual circumstances but I saying "all should consider" may be a little too strong. Unless by consider you mean briefly consider and then reject.

* and a further thought. If older people have some trouble with financial decisions, they are perhaps more likely to have trouble negotiating for repairs.

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Re: Reverse Mortgages

Post by dodecahedron » Fri Aug 14, 2015 2:07 pm

jalbert wrote:Heirs generally still have to sell the house. As you get payments from the reverse mortgage, a mortgage balance accumulates. The house also may appreciate or depreciate. When the house is sold, heirs get the net after payoff of the mortgage. But if you live a long time, and the mortgage balance grows beyond the home value, the mortgage provider covers the shortfall and there is no proceeds of the sale.
This article in Kiplinger suggests that the heirs don't actually have to sell the house in that case.
Kiplinger wrote: But if there is no potential equity, heirs may decide to simply hand the keys to the lender and avoid the hassle of trying to sell the home. Known as "deed in lieu of foreclosure," the heirs sign the deed over to the lender. "If the property was underwater, the heirs may have no interest in selling it or keeping it," says Diane Coats, senior operational oversight specialist for Generation Mortgage.

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Re: Reverse Mortgages

Post by OutInThirteen » Fri Aug 14, 2015 4:38 pm

dodecahedron wrote:
jalbert wrote:Heirs generally still have to sell the house. As you get payments from the reverse mortgage, a mortgage balance accumulates. The house also may appreciate or depreciate. When the house is sold, heirs get the net after payoff of the mortgage. But if you live a long time, and the mortgage balance grows beyond the home value, the mortgage provider covers the shortfall and there is no proceeds of the sale.
This article in Kiplinger suggests that the heirs don't actually have to sell the house in that case.
Kiplinger wrote: But if there is no potential equity, heirs may decide to simply hand the keys to the lender and avoid the hassle of trying to sell the home. Known as "deed in lieu of foreclosure," the heirs sign the deed over to the lender. "If the property was underwater, the heirs may have no interest in selling it or keeping it," says Diane Coats, senior operational oversight specialist for Generation Mortgage.
The amount of the mortgage forgiven (with a deed in lieu of foreclosure) is taxable income to the estate, the same as forgiven credit card debt.

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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by adamthesmythe » Fri Aug 14, 2015 6:24 pm

Forgot to say- many thanks for posting the links to this meeting. Interesting and thought-provoking reading.

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Re: Reverse Mortgages

Post by dodecahedron » Fri Aug 14, 2015 7:35 pm

OutInThirteen wrote:
The amount of the mortgage forgiven (with a deed in lieu of foreclosure) is taxable income to the estate, the same as forgiven credit card debt.
Not quite the same. I believe the amount of mortgage forgiven would generally be taxable at long term capital gains rates, while forgiven credit card debt would be taxed at ordinary income rates.

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Re: Reverse Mortgages

Post by OutInThirteen » Fri Aug 14, 2015 7:41 pm

dodecahedron wrote:
OutInThirteen wrote:
The amount of the mortgage forgiven (with a deed in lieu of foreclosure) is taxable income to the estate, the same as forgiven credit card debt.
Not quite the same. I believe the amount of mortgage forgiven would generally be taxable at long term capital gains rates, while forgiven credit card debt would be taxed at ordinary income rates.
You may be correct, in the situation I'm familiar with personally, the property turned out to be valued slightly above the outstanding mortgage balance.

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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by patriciamgr2 » Sat Aug 15, 2015 12:08 am

Bobcat: thanks for posting the link to the meeting itself. Unfortunately, I was only able to watch part of one day. I'm especially grateful for your summaries. I always learn from your posts. Thank YouI

Re: Reverse Mortgage Line of Credit. If it weren't for the hefty fees, this might be interesting. The amount available on the line of credit grows over time &, IMO, would be a decent way to fund entrance fees to assisted living--especially for those without LTC insurance.

As with a lot of products, the up-front & annual fees are what caused my friends not to proceed. Perhaps, in the future, the product will become commoditized as more competitors enter this market.
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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by The Wizard » Sat Aug 15, 2015 3:10 am

I have to wonder how important that Exponential Growth Bias thing is. I tend to think Not Very.
It's likely true that most of the general public isn't familiar with the rule of 72, I get that.
But much of the time when one puts $$ in a CD or T-note, the true value at the end of the period isn't much different than at the beginning, due to Inflation. Ignoring inflation is not a good thing...
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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by bobcat2 » Sat Aug 15, 2015 9:58 pm

bobcat2 wrote:The Retirement Research Consortium (RRC)17th Annual Meeting was held in Washington, DC last week. I have attended about half of the meetings and IMO this was one of the two best – the other being the 2012 meeting.

Here are some takeaways from this year’s RRC meeting that particularly struck me.

- Nudging behavior – One paper investigated that in setting DC retirement defaults, which workers are most affected by the default settings. The short answer is low income individuals are more affected by defaults than high income individuals. However, there is more to the story than the short answer.
Nudging Behavior
When setting defined contribution (DC) retirement plan defaults, who is most affected by default settings?

Prior research has strongly suggested that lower income employees are most affected by default settings, i.e. they are least likely to override the defaults in the plan. When the plan switches from defaulting out of the DC plan to defaulting into the DC plan lower income individuals are more likely to be switched from out of the plan to joining the plan.

The research paper presented at the conference looked at the issue of who is affected much more carefully than prior research. The new paper confirmed that lower income employees are indeed the most likely group to be moved from out of the plan to joining the plan when the default is switched from opt-out to opt-in. Or as the paper put it –
“Thus, the evidence indicates that the economic outcomes of low-income individuals are more influenced by defaults than those of high-income individuals, holding fixed the degree of alignment between individuals’ preferences and the particular options that are selected as defaults.“

However, the paper also showed that low income individuals are the most likely to opt-out of the retirement plan, if the default contribution rate is set so high as to cause a significant number of employees to opt-out.

Link to summary of paper - https://www.nber.org/programs/ag/rrc/rr ... 20Wang.pdf

If you go to the bottom of this page you can access James Choi's Powerpoint slides that accompanied his presentation.
https://nber.org/programs/ag/rrc/rrc2015/

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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by dodecahedron » Sun Aug 16, 2015 12:39 am

The Wizard wrote:I have to wonder how important that Exponential Growth Bias thing is. I tend to think Not Very.
It's likely true that most of the general public isn't familiar with the rule of 72, I get that.
But much of the time when one puts $$ in a CD or T-note, the true value at the end of the period isn't much different than at the beginning, due to Inflation. Ignoring inflation is not a good thing...
That's true (especially if you consider taxes as well as inflation.) On the other, if you are talking about something like unpaid credit card debt at typical rates charged on such debt, not understanding compounding presents more serious problems.

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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by bertilak » Sun Aug 16, 2015 9:56 am

bobcat2 wrote:Nudging Behavior
When setting defined contribution (DC) retirement plan defaults, who is most affected by default settings?

Prior research has strongly suggested that lower income employees are most affected by default settings, i.e. they are least likely to override the defaults in the plan. When the plan switches from defaulting out of the DC plan to defaulting into the DC plan lower income individuals are more likely to be switched from out of the plan to joining the plan.

The research paper presented at the conference looked at the issue of who is affected much more carefully than prior research. The new paper confirmed that lower income employees are indeed the most likely group to be moved from out of the plan to joining the plan when the default is switched from opt-out to opt-in. Or as the paper put it –
“Thus, the evidence indicates that the economic outcomes of low-income individuals are more influenced by defaults than those of high-income individuals, holding fixed the degree of alignment between individuals’ preferences and the particular options that are selected as defaults.“

However, the paper also showed that low income individuals are the most likely to opt-out of the retirement plan, if the default contribution rate is set so high as to cause a significant number of employees to opt-out.

Link to summary of paper - https://www.nber.org/programs/ag/rrc/rr ... 20Wang.pdf

If you go to the bottom of this page you can access James Choi's Powerpoint slides that accompanied his presentation.
https://nber.org/programs/ag/rrc/rrc2015/

BobK
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Could it be that high income investors are more able to save so have opted in on their own more often than low income investors. Now, when the default changes to "opt-in", there are simply fewer high income investors to be affected (they are already "in"). When defaults are changed to "opt-out" low income investors have a disincentive to deliberately select opt-in because they can really use the income NOW. High income investors continue to have less of a disincentive to opt out (same as they always did) -- they can better afford to defer some of their income.
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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by scottj19707 » Sun Aug 16, 2015 3:59 pm

Thanks for the link to the NBER materials, bobcat2.

I look forward to your further exposition on the proceedings...


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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by scottj19707 » Sun Aug 16, 2015 4:00 pm

Deleted redundant post,,, pc gremlins.
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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by bobcat2 » Mon Aug 17, 2015 12:20 am

Exponential-growth (EG) bias

Individuals frequently exhibit exponential-growth (EG) bias, the tendency to underestimate the exponential growth of an asset’s value over time due to neglecting compound interest, i.e. the interest on the interest.

On the asset side misunderstanding this causes people saving for retirement to get discouraged and give up on saving and investing for retirement, because they are underestimating the rate at which their savings will grow.

On the debt side dodecahedron has it right.
dodecahedron wrote:If you are talking about something like unpaid credit card debt at typical rates charged on such debt, not understanding compounding (EG bias) presents more serious problems.
Not understanding the interest on the interest when the rate is 22% or more on debt can be disastrous. Certainly it would lead you to take on a lot more debt than you think you are taking on. :( :shock:

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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by matjen » Mon Aug 17, 2015 8:37 am

Thank you for starting and fleshing out the topics in this thread BobK. I look forward to reading it all in more detail. :beer
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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by dodecahedron » Mon Aug 17, 2015 2:03 pm

bobcat2 wrote:Exponential-growth (EG) bias

Individuals frequently exhibit exponential-growth (EG) bias, the tendency to underestimate the exponential growth of an asset’s value over time due to neglecting compound interest, i.e. the interest on the interest.

On the asset side misunderstanding this causes people saving for retirement to get discouraged and give up on saving and investing for retirement, because they are underestimating the rate at which their savings will grow.
Another issue on the asset side: not understanding compounding reduces people's appreciation for the compounded impact of investment fees on their eventual retirement income.

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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by bobcat2 » Tue Aug 18, 2015 7:19 am

bobcat2 wrote:The Retirement Research Consortium (RRC)17th Annual Meeting was held in Washington, DC last week. I have attended about half of the meetings and IMO this was one of the two best – the other being the 2012 meeting.

Here are some takeaways from this year’s RRC meeting that particularly struck me.

- Any changes made to SS, Medicare, or Medicaid affect all three programs. Changes in any of these programs cannot be thought of in isolation. The programs are simply too interconnected.


Any changes made to SS, Medicare, or Medicaid affect all three programs

Social Security, Medicare, and Medicaid are highly interrelated. A change to any one of the programs affects all three programs. The effects of changes are disproportionally large for the low income elderly. For example, if Medicare premiums have big increases then low income retirees with small SS benefits take a much larger proportional hit to their SS income when the Medicare premium is taken out of SS benefits.

Unfortunately these points and more were made mainly by discussant Jason Fichtner, who has yet to turn his slides over to NBER. Thus, I have nothing I can link to that expands on my brief explanation of his analysis of the programs.

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Takeaway from Conference - How Prepared are Americans for retirement?

Post by bobcat2 » Wed Aug 19, 2015 10:37 am

Conference paper - Are Retirees Falling Short?

Are Americans well prepared for retirement? It depends.

A few years ago at the RRC annual meeting researchers at the Center for Retirement Research at Boston College, using data from a National Retirement Risk Index (NRRI) they had compiled and using target replacement rates they developed, showed that about 43% of American households were at risk of not being able to sustain their pre-retirement living standard in retirement. At the same meeting other researchers from the University of Wisconsin, using a formal life-cycle model of household optimal consumption & saving, showed that about 10% of American households were at risk of not being able to sustain their pre-retirement living standard in retirement.

In a paper presented at this year’s conference the Boston College researchers attempted to reconcile the above conflicting evidence. The paper found that “The main reasons for the stark differences between the two approaches are different assumptions. Two assumptions that stand out are how households consume their accumulated wealth in retirement and how they consume when their kids leave home.” I will add a third similar assumption later.

The first different assumption is retirement drawdown. The Boston College NRRI approach assumes that people buy an annuity when they retire, so that they can spend a steady inflation-adjusted amount throughout retirement. In short, the BC NRRI approach, much like a safe withdrawal rate (SWR) approach, has the household planning the same amount of annual income & spending over the entire retirement horizon, or, in the case of the SWR approach, about thirty years.

The life-cycle (LC) model approach is more subtle, and takes longevity risk explicitly into account. The LC model approach assumes households plan for less annual income & spending in far off years of retirement, when it is unlikely both members of the household will be alive. In even later years, when it is unlikely either member of the household will be alive, the planned income and spending levels are further reduced.

Example – A couple are exactly the same age. Today is their 64th birthday. Assuming neither’s health is particularly bad, they have about a 98% chance of both celebrating their 65th birthday in a year. OTOH the chance of their both being alive to celebrate their 85th birthday is only about 25% and that joint probability drops rapidly after age 85. The LC model then asks the obvious question. Is it reasonable for the couple to plan to have the same amount of income available at age 85 and beyond as they plan to have at age 65, given the drastically lower probabilities of their both being alive in the later years?

The LC model assumes that you plan today for sometime starting in your early 80s to have less income per year and that the amount of planned annual income will continue to drop, and at an accelerating rate, at later ages. Each succeeding year you are alive beyond your early 80s you would then adjust your income plan because you have survived another year. In reality, this would mean every few years purchasing additional annuity income for years 85 and beyond, while slightly lowering and smoothing planned income between now and age 85 to account for the cost of the additional life annuities. Some of this tail insurance annuitized income could be purchased in your late 60s and 70s by acquiring longevity life annuities that don’t kick in payouts until your mid 80s.

Despite these adjustments over time as you and your spouse continue to survive, the actual income per year for the household at ages near life expectancy and beyond will be lower than if one planned for level income throughout retirement. The actual income per year late in retirement will, however, be higher than what was originally planned for.

The points the authors make is planning the life-cycle way makes more people well prepared for retirement because it is less costly. It’s easier to fund the earlier years of retirement at a level that keeps the standard of living the same as in the latter years of peoples’ working lives, because the advanced possible years of retirement are planned at a lower income level given the low probability of spending that far in the future. (I would add that to me that this makes more sense than planning for the same amount of income for years 65-95.)

How much you should plan to reduce income at advanced ages is up to you. It depends on how averse you are to longevity risk. If you are very averse to longevity risk, you should plan on no dropping off in planned income as the household ages. This implies high annuitization of retirement income including delaying SS benefits, delaying db pension benefits if possible, and purchasing private life annuities, both immediate and delayed (aka longevity) life annuities. It does not imply relying much on so-called “safe” withdrawal rates. OTOH those households who are not are not very averse to longevity risk will rely less on annuitized income, and might only use such income to establish a safe floor of income throughout retirement. They might put more reliance on relatively high portfolio withdrawal rates in the early retirement years. If they continue to survive beyond their early 80s, the withdrawal rates will need to be lowered as they age.

A point the authors of the paper make is that when looking at available data, most household retirement planning does not appear to take this life-cycle approach. That is, people plan for the same level of income from the first year of retirement till death.

The second assumption difference is kids & spending. Under the life-cycle model approach, parents do not spend more on themselves once the kids become financially independent; instead they save the money for their own retirement that they previously spent on the kids. The Boston College NRRI approach OTOH assumes the parents spend the money on themselves, rather than saving it for retirement, once the kids leave home. The authors point out that most households tend to spend most of the money on themselves, rather than save it.

A third assumption I would add is that in the life-cycle approach the assumption is that once the mortgage is paid off that money is saved for retirement rather than spent. The Boston College NRRI approach, as in the above case of children leaving home, assumes the mortgage money is spent, rather than saved for retirement.

In a nutshell, if American households take into account the lower probability of being alive in planning later years of retirement and are not extremely longevity risk averse, save what they previously spent on kids once the nest is empty, and save the mortgage payments once the mortgage is paid off, then many more households will be well prepared for retirement. Conversely, if households do none of these things, many more households will be poorly prepared for retirement.

Link to paper – http://crr.bc.edu/working-papers/are-re ... -evidence/

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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by patriciamgr2 » Wed Aug 19, 2015 11:37 am

BobK: Excellent discussion. Let me thank you again for sharing your time & expertise with us.

One question: Most retirees I know are very worried about LTC expenses. Even without Alzheimer's, etc. in one's family history, it is a significant financial risk. The current pricing/availability of LTC insurance makes it difficult to insure against this risk the way one can address longevity risk.

I haven't had a chance to read the linked paper yet, but would you share--in general--what the latest thinking is on the impact of LTC costs on retiree families.

Thanks so much for posting this important thread.

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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by bobcat2 » Wed Aug 19, 2015 12:49 pm

patriciamgr2 wrote:BobK:

One question: Most retirees I know are very worried about LTC expenses. Even without Alzheimer's, etc. in one's family history, it is a significant financial risk. The current pricing/availability of LTC insurance makes it difficult to insure against this risk the way one can address longevity risk.

I haven't had a chance to read the linked paper yet, but would you share--in general--what the latest thinking is on the impact of LTC costs on retiree families.
I am not aware of any paper at this year's conference that directly addressed long-term care. LTC expenses are definitely a large risk facing retirees. However, there are several ways to address long-term care financing other than private LTCi and Medicaid. In general owning a house helps when dealing with LTC expenses.

- Sell your house.

- Take out a reverse mortgage line of credit (LOC) and don't use it until you need to pay for long-term care. The LOC can be used for in-home LTC expenses and I would think for institutional LTC expenses for the first person needing LTC while the other continues to live at home.

- Life insurance combo policies

- Blended life annuity/long-term care policies

- Longevity life annuities

- Life annuitization (longevity or immediate) for the partner not needing LTC

For more on the above products check out these links -
http://www.kiplinger.com/article/insura ... -care.html

http://www.forbes.com/sites/jamiehopkin ... -expenses/

http://agentchris.com/pay-for-long-term-care/

http://www.bogleheads.org/forum/viewtop ... sky#588888

http://www.urban.org/research/publicati ... ull_report

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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by bobcat2 » Wed Aug 19, 2015 4:03 pm

Paula Hogan has a post on her blog that gives an overview of the papers presented at the RRC Annual Meeting.
Here's the link - http://blog.paulahogan.com/wealthinking ... retirement

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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by bobcat2 » Thu Aug 20, 2015 9:59 am

The luncheon speaker on the second day of the RRC Annual Meeting was Joseph Coughlin, the director of MIT’s AgeLab. Kimberly Blanton at the Squared Away Blog gives an overview of Coughlin's presentation.

The Future of Retirement is Now

Link to Squared Away Blog - http://squaredawayblog.bc.edu/

Link to MIT AgeLab - http://agelab.mit.edu/

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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by bobcat2 » Fri Aug 21, 2015 9:33 am

bobcat2 wrote:The Retirement Research Consortium (RRC)17th Annual Meeting was held in Washington, DC earlier this month. I have attended about half of the meetings and IMO this was one of best.
Here are some takeaways from the RRC meeting that particularly struck me.

- Duration matching of ST and LT TIPS bond funds can reasonably replicate a TIPS ladder.

Duration Matching using ST & LT TIPS bond funds can roughly replicate a TIPS ladder

At the 2012 RRC Annual Meeting Robert Merton’s luncheon address was by far the best presentation I have ever heard on financial planning for retirement.
Link to Merton slides - https://www.nber.org/programs/ag/rrc/rr ... tation.pdf

More recently Merton wrote the short article, Applying life-cycle economics, which nicely covers the points he made at the conference and more.
Link to article - http://www.nestpensions.org.uk/schemewe ... cs,PDF.pdf

In rereading Applying life-cycle economics a few months ago I was struck by Merton’s comments about level 2 conservative retirement income. Level 1 conservative income is annuitized income from Social Security, db pension, and private life annuities. Level 2 conservative income is basically a TIPS ladder.

These two levels of conservative retirement income have different desirable and undesirable properties. This makes it prudent for a retiree to hold both levels of conservative income, not one or the other. Annuitized income contains a mortality credit that bonds lack and also provides longevity protection that bonds lack. OTOH bonds provide some flexibility in the timing of the income streams that annuitization lacks. Once both members of the household die the annuitized income streams have no residual value, while bonds retain their full present value as bequests.

However, in the article Merton doesn’t construct a TIPS ladder for level 2 inflation-protected conservative income. Instead as Merton puts it - the assets assigned to level 2 income are invested in a portfolio consisting of a ST TIPS bond fund and a LT TIPS bond fund that is duration matched to the targeted stream of payments.

At this year’s RRC Meeting I ran this idea of duration matching with bond funds past several knowledgeable participants and they agreed that this is a reasonable substitute for a TIPS ladder. The ability to have this type of discussion is one of the great benefits of conferences such as the RRC Annual Meeting.

As Merton noted in a later video presentation to do this really well you also need to take into account at least convexity, but as a rough and ready solution for an individual simply matching weighted fund duration to the duration of the targeted stream of payments should give you income roughly as safe as the ladder. In addition, this approach provides somewhat more flexibility and in my opinion is easier to set up and manage than a TIPS ladder.

Stylized example to follow.

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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by bobcat2 » Sat Aug 22, 2015 7:14 am

Duration Matching of ST & LT TIPS bond funds can roughly replicate a TIPS ladder

Here is an example of the weighted portfolio of the two TIPS funds duration method in lieu of the TIPS ladder for the targeted stream of payments (annual income).

Example – A 63 year old wants $10,000/year in real income starting in two years at age 65 for a ten year period ending at age 74.

The duration of the spending stream is 7 years – the average of the spending range of 2 through 12 years.

Calculate the present value (PV) of each year’s $10,000 by discounting each $10,000 by the current yield on TIPS for each year.

The sum of the ten PVs is the amount to be invested. If the ST TIPS fund currently has a duration of two years and the LT TIPS fund has a duration of eight years, find the asset allocation (AA) between the two funds that gives a duration of seven years. That is -

2X +8(1-X) = 7
2X -8X+8 = 7
6X = 1
X= 1/6
And (1-X) = 5/6

One sixth of the assets should currently be in the ST TIPS fund and five sixths of the assets should be in the LT TIPS fund. Redo this calculation at least once a quarter as the duration of the income stream shortens and the duration of the funds change as interest rates move and the fund managers change the maturities of the bond portfolios in the funds.

When a step in this pseudo ladder is inside two years of being spent the LT TIPS fund is replaced by a money market fund. The weights between funds inside this two year window are then calculated between the ST TIPS fund and the money market fund.

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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by bobcat2 » Sun Aug 23, 2015 8:14 am

bobcat2 wrote:The Retirement Research Consortium (RRC)17th Annual Meeting was held in Washington, DC earlier this month. I have attended about half of the meetings and IMO this was one of the two best – the other being the 2012 meeting.

Here are some takeaways from this year’s RRC meeting that particularly struck me.

- All home owners as they approach retirement should consider a reverse mortgage line of credit.
A reverse mortgage line of credit is a flexible asset and a powerful financial planning tool.

Reverse Mortgage Line of Credit (RM LOC)

Home Equity Conversion Mortgage (HECM) - The reverse mortgage program insured by the Federal Housing Administration (FHA)

My wife and I had dinner the night before the conference began with two prominent financial planners who were in DC to attend the retirement conference. During the dinner the topic of reverse mortgages came up casually. I was surprised, actually closer to stunned, by how enthusiastic they both were about a reverse mortgage with a line of credit. I had always thought of reverse mortgages lump sum or monthly income and had given little or no thought to the line of credit option. After getting home that night I got on-line and investigated reverse mortgages. I suddenly realized that a reverse mortgage line of credit is a flexible asset and a powerful strategic investment tool.

Truly one of the great advantages of conferences is the ability to interact with knowledgeable individuals.

Key RM LOC features
Any money from any reverse mortgage is a loan and not subject to income taxes.
An important aspect of a RM LOC is line of credit growth. This makes the RM LOC an attractive financial tool for most homeowners.


The two factors of LOC growth
1. The LOC grows at the rate of (interest rate+1.25%) – i.e. the growth rate changes with changes in interest rates.
2. Payments made to reduce the unpaid principal balance causes the LOC to increase.

Often reverse mortgages are used to pay off an existing mortgage, to pay taxes, to pay off other debts, or for day to day income. But a reverse mortgage line of credit offers many other uses, and there are many financial strategies employing reverse mortgages.



Reverse Mortgage Line of Credit Strategies

- Protect investments – A RM LOC alleviates the sequence of returns risk in retirement by substituting withdrawals from the LOC for portfolio withdrawals when markets decline. Proceeds from the line of credit may be repaid after markets recover. Also the LOC provides liquid assets to purchase equities cheaply after a market decline. Again the loan can be repaid when the equity market recovers.

- Protect against home price decline - A RM LOC provides a very valuable hedging property for home prices. If the home price declines substantially after several years the unused LOC may exceed the new value of the home.

- Credit Line growth - The LOC grows at the rate of (interest rate+1.25%), regardless of whether the home appreciates or depreciates in value.

- Credit Line appreciation – If the home appreciates more than scheduled, you can refinance the RM and reset the maximum amount you can draw.

- Defer Social Security benefits – When deferring SS benefits to a later age you can replace some or all of the SS benefits you will be receiving in the future with withdrawals from the LOC in the interim.

- Defer db pension benefits – Same as deferring SS benefits.

- Replace Social Security income or db pension income of deceased spouse

- Pay for in-house LT Care

- Pay for institutionalized LT Care for spouse while remaining spouse continues to live in house

- Pay for college tuition of grandchildren

- Purchase immediate life annuities or longevity annuities in chunks over time

Other possible strategies
- Buy-out spouse for divorce settlement
- Buy-out business partner
- Purchase investment property
- Purchase second home
- Purchase life insurance
- Purchase LTCi
- Make charitable contributions

- Using a HECM for purchase you can purchase a more expensive home yet have no mortgage payments.

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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by Northern Flicker » Sun Aug 23, 2015 2:05 pm

Thanks for the info. Do you know if closing costs are more reasonable than with traditional RM's? I assume also that someone needs to be 60 or older to qualify.

-jalbert

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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by Northern Flicker » Sun Aug 23, 2015 4:22 pm

Turns out reverse mortgages not only have hefty closing costs, but a monthly fee wrapped into the monthly interest charge. Don't know if this applies to the RM Heloc bobcat mentioned, but it seems only to be a good deal if one will stay in the home a very long time or if used as an emergency fund if retirement assets come up short, or say as LTC insurance if and when needed.

-jalbert

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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by bobcat2 » Sun Aug 23, 2015 4:50 pm

I'm certainly not an expert on reverse mortgage ongoing fees, but the only ongoing fee I am aware of is the mortgage insurance premium (MIP) annual rate of 1.25% on the unpaid loan balance. This insurance is how the FHA can guarantee the non-recourse feature of the loan.

There is also ongoing interest accruing on any outstanding loan amount. This is a loan. :)

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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by Broken Man 1999 » Sun Aug 23, 2015 7:19 pm

After reading Wade Pfau's paper on Reverse Mortgage Lines of Credit, plus reading a bit from this thread, I contacted a RM provider to explore such a product, with actual, real-life numbers fleshed out. I received the info yesterday.

I'll post my findings after I get a chance to read the info packet via a new thread, so this thread isn't pulled away in one direction.

Might have value for some, not for others.

Being over-housed, with spouse reluctant to consider move, this might be the ticket for me to pull some equity out, or at least have the ability to do so.

It didn't cost to get the offer, I purposefully kept the value of home conservative, and also requested no credit pull, though one would certainly be made should I start the process to obtain a RM.

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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by bobcat2 » Sun Aug 23, 2015 7:51 pm

Here are some sources of information on reverse mortgages on the Internet -

From the RRC meeting – Using Your House for Income in Retirement
Link – http://crr.bc.edu/special-projects/book ... etirement/

From the RRC meeting – Learn about Reverse Mortgages
Link- http://squaredaway.bc.edu/learn-more/reverse-mortgages

From the RRC - The Government's Redesigned Reverse Mortgage Program
Link - http://crr.bc.edu/wp-content/uploads/20 ... 1_508x.pdf

Reverse Mortgages – The Mortgage Professor
Link- http://www.mtgprofessor.com/reverse_mortgages.htm

Jane Bryant Quinn - A great reverse mortgage idea: Take a credit line now
Link- http://janebryantquinn.com/2013/08/a-gr ... -line-now/

How One Finance Professor Came Around to Reverse Mortgages
Link- http://reversemortgagedaily.com/2014/12 ... mortgages/

Research Review of Reverse Mortgages in Retirement Planning
Link- http://toolsforretirementplanning.com/2 ... -research/

Understanding Reverse
Link- http://understandingreverse.com/

Strategic Uses of Reverse Mortgages for Affluent Clients
Link - http://toolsforretirementplanning.com/2 ... ighlights/

Reverse Mortgage Retirement Planner
Link- https://cdn.aag.com/infokit/pdf/AAG-Rev ... o,-211,488

AARP and HUD are also good online sources of information on Reverse Mortgages.
AARP - http://www.aarp.org/money/credit-loans- ... mortgages/
HUD - http://portal.hud.gov/hudportal/HUD?src ... m/hecmhome

There are many other online sources of information about reverse mortgages, but the above are a good set of places to start.



books

The New Reverse Mortgage – Scott Gordon
Amazon link- http://www.amazon.com/gp/product/098896 ... d_sim_14_1

Understanding Reverse – Dan Hultquist
Yes, the book that accompanies the above website of the same name.
Amazon link- http://www.amazon.com/gp/product/150291 ... oks&sr=1-1

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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by SGM » Mon Aug 24, 2015 10:28 am

Paula Hogan was exactly right when she discussed the recurrent theme of low income persons vs. high income persons for retirement planning policies. Regarding the presentation concerning catch up contributions titled, "Do Tax Incentives Increase 401(k) Retirement Savings", this seemed especially acute. Not surprisingly, low income persons do not take advantage of the catch up provision to the extent that high income persons do. Certainly there is a cost to allowing high income persons to use the catch up provision initially, but doesn't the government eventually get the tax revenue when high income people take their RMDs?

Although increasing limits for the low income persons does not necessarily increase total savings it does allow for the possibility of a greater portion of the savings to compound tax deferred while decreasing their current taxes.

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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by Northern Flicker » Mon Aug 24, 2015 1:28 pm

I'm certainly not an expert on reverse mortgage ongoing fees, but the only ongoing fee I am aware of is the mortgage insurance premium (MIP) annual rate of 1.25% on the unpaid loan balance
Someone has to pay for the longevity insurance implied by the fact that the homeowner(s) can live in the house until they die without making any payments, and the mortgage may be upside-down when they die. Since residual equity is realized by the homeowner or heirs upon sale, it is not being covered by an actuarial mortality pool.

FHA tacks on an explicit MIP fee to the interest rate. I believe you will find a similar fee with non-FHA products, and I suspect it is hidden in a higher interest rate, instead of being explicitly itemized, with some of these products.

RM's are quite profitable for the provider if the homeowner sells the house without living in it a long time after originating the mortgage. Are RM helocs different in this regard?

-jalbert

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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by bobcat2 » Tue Aug 25, 2015 9:09 am

SGM wrote:Paula Hogan was exactly right when she discussed the recurrent theme of low income persons vs. high income persons for retirement planning policies. Regarding the presentation concerning catch up contributions titled, "Do Tax Incentives Increase 401(k) Retirement Savings", this seemed especially acute. Not surprisingly, low income persons do not take advantage of the catch up provision to the extent that high income persons do. Certainly there is a cost to allowing high income persons to use the catch up provision initially, but doesn't the government eventually get the tax revenue when high income people take their RMDs?

Although increasing limits for the low income persons does not necessarily increase total savings it does allow for the possibility of a greater portion of the savings to compound tax deferred while decreasing their current taxes.
Here is a link to the summary of the paper SGM is discussing.
Do Tax Incentives Increase 401(k) Retirement Saving?
https://www.nber.org/programs/ag/rrc/rr ... gliano.pdf

Also take a look at the slides of the presentation by Matthew Rutledge of Boston College and the discussant slides by Patrick Purcell of the Social Security Administration. Here is a link with a page that has the slides. They are located in the panel 2: Asset Allocation section of the page. Link - https://www.nber.org/programs/ag/rrc/rrc2015/

Typically, including this case, the slides of the discussant are more informative than the slides of the paper's author. The presenter slides often focus more on how the research was done. The discussant slides discuss what is important about the topic of the paper and its findings and also what is important in the general topic that has been left out of the paper.

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Last edited by bobcat2 on Tue Aug 25, 2015 9:25 am, edited 1 time in total.
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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by Grt2bOutdoors » Tue Aug 25, 2015 9:24 am

jalbert wrote:
I'm certainly not an expert on reverse mortgage ongoing fees, but the only ongoing fee I am aware of is the mortgage insurance premium (MIP) annual rate of 1.25% on the unpaid loan balance
Someone has to pay for the longevity insurance implied by the fact that the homeowner(s) can live in the house until they die without making any payments, and the mortgage may be upside-down when they die. Since residual equity is realized by the homeowner or heirs upon sale, it is not being covered by an actuarial mortality pool.

FHA tacks on an explicit MIP fee to the interest rate. I believe you will find a similar fee with non-FHA products, and I suspect it is hidden in a higher interest rate, instead of being explicitly itemized, with some of these products.

RM's are quite profitable for the provider if the homeowner sells the house without living in it a long time after originating the mortgage. Are RM helocs different in this regard?

-jalbert
http://portal.hud.gov/hudportal/HUD?src ... m/hecmhome

http://www.benefits.gov/benefits/benefit-details/709

http://www.mtgprofessor.com/ext/calcula ... lator.aspx

http://www.consumerfinance.gov/askcfpb/ ... gages.html
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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by bobcat2 » Tue Aug 25, 2015 9:37 am

jalbert wrote:
I'm certainly not an expert on reverse mortgage ongoing fees, but the only ongoing fee I am aware of is the mortgage insurance premium (MIP) annual rate of 1.25% on the unpaid loan balance. This insurance is how the FHA can guarantee the non-recourse feature of the loan.

There is also ongoing interest accruing on any outstanding loan amount. This is a loan. :)
BobK
Someone has to pay for the longevity insurance implied by the fact that the homeowner(s) can live in the house until they die without making any payments, and the mortgage may be upside-down when they die. Since residual equity is realized by the homeowner or heirs upon sale, it is not being covered by an actuarial mortality pool.

FHA tacks on an explicit MIP fee to the interest rate. I believe you will find a similar fee with non-FHA products, and I suspect it is hidden in a higher interest rate, instead of being explicitly itemized, with some of these products.

RM's are quite profitable for the provider if the homeowner sells the house without living in it a long time after originating the mortgage. Are RM helocs different in this regard?

-jalbert
What are the costs I will have to pay for a reverse mortgage? - Consumer Financial Protection Bureau
Link - http://www.consumerfinance.gov/askcfpb/ ... tgage.html

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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by Northern Flicker » Tue Aug 25, 2015 1:35 pm

1.25% on top of the interest rate plus expensive closing costs-- that's expensive cash for anyone with conventional means of meeting their cash or liquidity needs. I think RM's make sense for someone wanting to stretch their retirement savings by spending down home equity, and who will live a long time in the home. For someone planning to leave assets to heirs, they also might save taxes by avoiding liquidation of assets with a large embedded gain (and then the heirs ultimately get a stepped up basis).

-jalbert

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Re: Some HiLites of the Retirement Research Consortium Annual Meeting

Post by SGM » Tue Aug 25, 2015 5:42 pm

I am not very excited about reverse mortgages. I can see how they would be useful as a last resort and for those without a bequest motive. I think Paula Hogan and other financial advisors see a lot of people who are in danger of running out money in retirement or need to spend more than their portfolios can support. If you need the money and can live in your house for a long time it could be a good option. As my FIL used to say concerning insurance companies, "How do you think they can afford those big buildings?"

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