The post-war growth of much of the developed world has been very good for baby boomers. They were able to buy houses for $20,000 that are now worth $800,000. They had low cost education, and for a significant part of their lives, low cost healthcare. They also spent their money – living lives unimaginable to their war era parents: Cars, vacations, college educations for their children. And very often, their employers offered pensions! All was going to be fine – right?
Not so much…
The golden era of ‘live today and worry about tomorrow sometime later’ is long gone for baby boomers, and now for everyone else as well.
Now that retirement looms, many of these older workers are faced with a future with limited incomes. Some may have pensions, and retirement accounts, but many others are facing a retirement funded by social security.
The good news is that many of these people have assets to lean on. In 2013, about 65% of older homeowners had paid off their mortgages and owned their homes free and clear. The reality is that for these older homeowners they may be ‘asset rich, cash poor’.
So what to do if you, or someone you love, is asset rich and cash poor? The first thing to consider is that money is emotional. People have significant emotional investment in their assets that shouldn’t be discounted. So the idea of ‘just sell it’ isn’t generally the best first option.
The second thing to do is to do some math. And it’s pretty simple math. How much does this asset cost to keep? A piece of art, for example, the answer is next to nothing. For a house, it’s significant - taxes, maintenance, furnishing, heating and cooling.
Next, what is the sale value of the asset at this point in time – and what options in life could be afforded by selling the asset? Web sites like Zillow.com can give you a ballpark price for house values, and sites like Invaluable.com can help with art prices.
But again, humans are emotional – and sometimes the value today doesn’t matter – the owner will not sell.
So then what?
Well, the good news is that a hard asset can be borrowed against. A home equity loan could provide the capital someone needs to live on and pay the bills. They are offered at generally reasonable interest rates, with clear repayment terms. BUT, if the homeowner no longer has cash flow from a job, for example, a home equity loan isn’t going to work because they have nothing to pay it back with.
Another option that is increasing in popularity is the reverse mortgage. In a traditional mortgage you paid a bank over the course of 30 years and in the end you own your home outright. A reverse mortgage is basically the bank buying your house back from you. Every month they will send a check, and take more equity in your home. As this happens, over time you own less and less of your home.
These products are structured in such a way that you can stay in your house until either you pass away, you sell the house, or you move out for more than 12 months. The best thing about these loans is you don’t have to move if you don’t want to. You can even stay past the point where the bank owns the house outright. There is insurance on these loans that will pay for this situation. So when the house is eventually sold, any shortfall of funds, where the house is worth less than what is owed to the bank, this shortfall is covered by the insurance.
Another option is to borrow against your retirement accounts, or life insurance policies. Some 401(k)s offer this option, but you have to check with your plan provider to see if this is allowed with your specific plan. You can usually borrow against your cash value whole, universal or variable universal life insurance policies if you have one. But you need to be very careful that you have a repayment plan in place because the interest you pay can destroy any value you have in the plans. As for IRAs and term life insurance plans, you cannot borrow against them.
But the bottom line is this: Kicking a problem down the road only makes it bigger. Once an asset is gone, it’s potential for growth goes with it. And the logical next step is debt. Be very careful when you tap into your assets. You need to make sure the money will last.
With an aging population – these types of ways to get money out of assets will only increase.
The best thing to do is also the hardest: Take emotion and sentimentality out of the equation. Ask yourself what can be done to ensure that problems are not being kicked down the road, or on to the next generation. After all, as hard as change may be, it can be way worse to delay or to avoid problems until they come home to roost.