What Is the Most Vulnerable Financial Stage in A Retiree’s Journey?
A common and simplified overview of the three primary retirement stages suggest these three: The go-go, slow go and no go years. In his book, “The Prosperous Retirement, Guide to the New Reality” Michael Stein, CFP, describes three stages of retirement, some of which I highlight below. But the most important aspect of these stages is managing the retirement asset to make sure that money is available to the client when its needed most.
The retirement income crisis continues to loom and the three biggest concerns are that (1) we are living longer (2) are highly indebted and (3) have not saved enough. The presence of these items means that a successful retirement will require more diligence in planning and innovation in thinking. Later in the article, I will share with you a strategy that could be very hopeful for your boomer clients.
But first let’s review the three stages of retirement.
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Active retirement — the ‘Go-Go’ stage
Everything you had planned in your retirement movie, golf daily, cruises, travel, dinner out, line dancing, etc. are in motion. As Michael Stein wrote in his book, The Prosperous Retirement, Guide to the New Reality; “These activities also may result in expenditures that are well above the budget on which the retiree lived before retirement. If this seems surprising, reflect on how much you spend while traveling on vacation versus what you spend when you are at home in a more normal routine. After a while, reality generally takes over, things settle down to a less frenetic pace, and an active, satisfying, and thoroughly enjoyable stage of retirement begins.”
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Passive retirement — the ‘Slow-Go’ stage
Retirement expert, Tom Hegna humorously states about the Slow Go stage, “You can do everything that did in the go-go stage, you just don’t want to anymore…you don’t even want to go downtown after dark anymore because Dad doesn’t see that well at night.” Again, Author Michael Stein opines that “after some years of active retirement, people begin to grow weary of long vacations, feel less than enthusiastic about running through airports and train stations, grow tired of living out of suitcases on trips, and, in general, decide to let the pace of their lives slow down.”
“The transition from active retirement to passive retirement generally begins when retirees reach the mid-70s and it lasts for about 10 years. There is no social science study to verify this observation, but watching hundreds of retirements has led me to this conclusion. Sometimes people feel like traveling and being active well into their 80s. Sometimes deteriorating health causes people to slow down before they reach their 70s.”
“Typically, most people can be about as active as they want until their 70s, then, inexorably, old age creeps up on us and we slip quietly, without trauma, into the passive retirement stage. These older people take fewer and fewer trips and then, ultimately, no trips. They buy no new cars, no new houses. In fact, this may be the time that people downsize their homes, purchase fewer new clothes, and allow a quieter and less expensive lifestyle to take over. During the years of the passive stage, the budget typically declines by 20 to 30%, but the decline may be masked by the upward push of inflation.”
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Final retirement — the ‘No-Go’ stage
Finally, the quiet pleasures give way to the unpleasant realities of the third stage of retirement, the final stage. The “slow-go” stage gives way to the “no-go” stage. Failing health makes medical treatment and nursing care the defining characteristics. This stage may be prolonged or it may be blessedly brief. Managing this health uncertainty is one of the principal challenges to retirement.
So, at what stage is a retiree most financially vulnerable? The truth is that this can happen at any stage, but it is exacerbated later in life.
Creating Income When You Need it Most – Meet Dave and Gina
With this in mind, let’s take a forward-thinking peek into a solution that a Reverse Mortgage could factor into the equation. Dave and Gina are a 65-year-old couple living in a $400,000 home. They have a $100,000 mortgage with a $1,000-month payment for the next 10 years. Currently, they have enough cash flow and cushion that they can continue to make a monthly mortgage payment without too much hardship. However, with a minor adaptation they can dramatically improve their financial outlook.
Changing Retirement Outcomes Without Changing Behavior
If we eliminate the need for a financial behavior change and still are able enhance retirement outcomes, it is a win win.
One of the most powerful things an advisor must overcome is the behavioral aspects affecting the client. Getting them to change a spending pattern or saving pattern or impulse pattern or to see something new or different is very difficult. However, if we eliminate the need for a financial behavior change and still can enhance retirement outcomes, it is a win win.
So, in this case, we are not going to ask them to change their financial behavior. If they like their payment, they can keep their payment! But rather we will ask them to simply switch the conduit for where those payments go. This is called a HECM Exchange. We swap out their traditionally amortizing loan with a Reverse Mortgage and continue to have them make the same monthly payment. NO Behavior Change! When we do this something amazing happens:
- Their loan balance will decrease with each payment (just like their regular mortgage)
- They can claim a tax deduction (just like their regular mortgage)
- For every dollar, they use to make a payment, that dollar goes into an appreciating and accessible growing line of credit! (Not like their old payment)
That’s the new part! In a regularly amortizing loan, when you make a payment, you cannot call back after 10 years and say, I would like to draw out $50,000. Not without qualifying for a new loan and producing loan documentation etc. But with the HECM exchange, for every dollar you pay, it not only reduces your outstanding balance, but it INCREASES your line of credit (which is already growing at around 5.75% today)
A Tale of Two Charts
The first one shows the loan balance (red) decreasing and the Line of Credit (green) increasing.
The second chart shows the HECM line of credit growing to more than $1.3 million by age 95.
- Go – Go Years: Age 65 to 75 – Line of Credit balance $375,000
- Slow Go Years: Age 75 to 85 – Line of Credit Balance $746,000
- No Go Years: Age 85 -95 – Line of Credit Balance $ 1.3 million dollars
Seeing the power of having your client (who can afford to do so) switch conduits to a HECM and make a voluntary payment on the HECM, affords the opportunity of all the benefits of a traditionally amortizing loan but the supercharged ability to create a deferred income stream or cash reserve during the Slow Go or No Go phases of retirement.
Does it make sense for your clients to create a reserve fund for the out years of retirement, especially if they don’t have to change any financial behavior patterns already established?
Drop me a note in the comments and let me know your thoughts?
Don Graves, RICP®, CLTC®, Certified Senior Advisor, CSA®
Latest posts by Don Graves, RICP®, CLTC®, Certified Senior Advisor, CSA® (see all)
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Categories: Advisors, Financial, Financial Planning
Tags: Baby Boomers, HECM Line of Credit, HECM with a Payment, Phases of Retirement
Brilliant. Can the same structure work with a H4P?
Yes it absolutely works with the H4P
Claim a tax deduction?isn’t the payment paying back the loan to increase the loc not the interest .