Posts Tagged Reverse Mortgage

This is Part 4 of my review of Die Broke.  You can read the first three parts of this series by clicking on the following links:

Die Broke, Part 1 - Quit Today

Die Broke, Part 2 - Pay Cash

Die Broke, Part 3 - Don’t Retire

Step 4: Die Broke

Two Cornell University economists, Robert Avery and Michael Rendall, predicted that Baby Boomers would be the recipients of a $10 trillion transfer of wealth.  While this looks good on paper, the authors dispute this claim, citing a number of factors.  They believe that relying on this inheritance is bad for both your relationship with your parents, and for society in general.

Inheritance Obsession

Financial advisers have morphed into “inheritance counselors”.  This wouldn’t be so bad, but it leads you to count your chickens before they’re hatched.  Not only are you not guaranteed a large inheritance, but you’re not entitled to it, either.  The obsession with inheritance , a bad relic of the past, is bad for society.

Inheritance isn’t an entitlement

The Reagan tax cuts of the 1980’s allowed couples to pass on $1.2 million of their estates tax free.  By then, the contractual nature of inheritance shifted from taking care of a tangible asset, such as a farm, to intangible assets, like T Bills.

Pot of gold may be empty

By the time Baby Boomers realize any inheritance, it could be decimated by gifts made by their parents to charity or family. At the time of writing, about 25% of college tuition prepayments were made by grandparents.  Studies show that rather than decrease, spending patterns rise.  Rising health care costs may lead to a “million-dollar death”.

Patrimony is problematic

Inheritance is an inefficient way to pass on wealth, due to high estate taxes and family fights over the assets.  Parents struggle to maintain an estate, usually at the expense of living a full life.  Choosing a quality of death over a quality of life is soul killing - children must wait for someone to die in order to collect.  Studies show that receivers of inheritances have an erosion of their work ethic.  Inheritance is also bad for society, as the rich get richer.

Dying broke means living well

The old idea of inheritance was fine for a time when jobs were secure, real estate values climbed, credit cards were wonderful tools, and retirement was an idyllic reward.  Those days are gone.  Instead, assets should be treated as resources that:

• Can help your family now
• Allow you to enjoy your wealth with them while you’re alive
• Shouldn’t outlive you
• Should be prioritized to improve the way you live, not the way you die

A Program for Dying Broke

1. Insure your streams of income - maintain term life insurance until you can cover potential losses through savings, and get a good disability insurance policy as early as you can
2. Take your own pulse - maintain good major medical coverage, and look into long-term care insurance
3. Take out some longevity insurance - annuities pay a predetermined income for the rest of your life, and although they may be irrevocable, you may be able to tap the principal at a reduced income
4. Get paid to live in your house - reverse mortgages pay you as long as you live in the house, and the bank settles the loan at the time of your death
5. Get a charity to pay you - charities offer products similar to annuities and reverse mortgages, and you get a tax deduction in the process.  You may also get to attend a testimonial dinner in your honor!
6. Start giving it away - there’s no limit to non-cash gifts, and the IRS allows a tax free gift of $10 thousand each year per person.  If you apply it to your estate tax exclusion, you get the tax benefit, not your estate.  Payments to educational or medical organizations are also tax exempt.
7. Take out a whole death policy - get a small whole life policy to pay for your funeral and clean up your debts.  This method is more efficient than prepaying for funerals.  Spend every last penny that you’ve got.

Dying broke means:

• Abandoning impossible searches (secure, well-paying, fulfilling jobs)
• Forsaking counterproductive financial practices (going into debt and failing to save)
• Eliminating arbitrary deadlines (retirement at age 65)
• Giving up dreams of immortality (building and passing along estates)
• Dying broke is a more efficient use of your money.

My take on the Die Broke Plan:

1. Done and done.  I believe strongly in having insurance.
2. No surprise here, either.
3. I’ve got to do some reading up on annuities.  I’ve got time though, as I’m still in my forties.
4. Boy, this one’s going to be a hard sell, both to me and my family.  I’m not quite sold on reverse mortgages.  I’m still trying to poke holes in this one.  I’ll probably revisit this topic in a future post.
5. This might work.  Again, I have to do more reading on the subject.  More fodder for a future post.
6. I believe in doing this.  I can think of two cases in my own family that were on opposite ends of the spectrum, miserly and generous.  I intend to help my loved ones while I can see them enjoy it, rather than have them slug it out in probate court.
7. My mom did this with a term policy, but the proceeds weren’t enough to cover all of the expenses.  Make sure the insurance is adequate.

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