Reverse mortgages are becoming more popular as individuals struggle with earlier-than-planned retirements, skyrocketing property taxes, a lack-luster stock market and the ever-increasing cost of living.  Thankfully, reverse mortgages are also becoming less expensive, but certainly should not be considered cheap at this time.

What is a reverse mortgage and should you consider one?

A reverse mortgage allows you to tap the equity in your house to provide an inflow of cash.  You can take a one-time lump sum payment, set up a line of credit or you can receive a series of payments for a period of time.  To obtain a reverse mortgage, you must be at least age 62 and either own your house free and clear or be able to pay off the current mortgage with the proceeds from the reverse mortgage.  The older you are at the time the reverse mortgage is taken out, the greater percentage of the equity you can receive.

The key benefit of a reverse mortgage is the money borrowed does not have to be paid back until the house is either sold or the owner passes away.  You receive the money now and make no payments in the interim.

There are initial fees to obtain the mortgage, interest accrues on the proceeds that are outstanding and you are required to continue to make the property tax and insurance payments as well as maintain the property.

For those with limited resources, it can provide the means to pay off debt incurred because of medical bills or other reasons.  It can provide the cash needed to make home repairs, catch up on back bills, purchase a new vehicle or even simply go on vacation.  With the monthly payment option it can provide ongoing cash to help maintain the current standard of living.

Be aware that while providing the benefits to the owner of the house while living, the reverse mortgage is required to be paid back when the owner passes away or elects to sell the house.  This means if your intention is to leave the house to the children, they will be required to pay off the mortgage to keep the house.

While not for everyone, it can certainly provide some relief to those individuals wanting to stay in their home and having cash flow issues or concerns.

I have spent much of 2010 preaching about Roth conversions.

The fact that tax rates are pretty much guaranteed to go up.  By converting now, you are locking in your tax rates and are not at the mercy of the tax increases.

The fact that most individuals are not dropping into a lower tax bracket when they retire, which was the primary reason for initially delaying the taxes paid.  To drop into the 10% tax bracket your taxable income would have to drop below $14,000 MFJ or below $7000 single.

The fact that for many, their account values are still down from the market drop and they can pay the tax on those lower values.  When the account value increases, it will all be tax free income.

The fact that Roth IRAs do not have required minimum distributions at age 70 1/2, allowing you to continue having the IRA grow tax free longer.

The fact that you can potentially avoid taxability of your Social Security benefits in the retirement years if you can get your income below the limits.

The fact that if you are no longer required to take RMDs might allow you to qualify for other types of assistance such as EPIC, low income property tax breaks, HEAP, subsidized Medicare Part D, the STAR school rebate and others.

The fact that you have some access to the funds at younger ages without incurring the early distribution penalties.

There are many reasons to do a Roth conversion.  Some of the reasons for not doing a Roth conversion include:

You currently do not have a Roth and will need access to the money within 5 years.  A Roth IRA account needs to be established for 5 years before you can pull any money out penalty free.

You anticipate that 2011 and 2012 will be higher than normal income years and will be paying taxes in a higher income tax bracket.

2011 and 2012 will be years that you will qualify for college tuition credits or other tax credits that the conversion would put you over the eligibility amount.

In all these cases you might want to consider a partial conversion however.

I see the ability to do a Roth conversion in 2010 as a premier opportunity to lower the taxes that you will pay in retirement.  Do not let this opportunity slip you by.

Back to School is here for some and right around the corner for others.  It can be a tough time for families trying to purchase school clothes within a family budget and meet what the child wants in the latest trends.

Prior to beginning your school shopping, you need to establish the amount that you have available to spend for clothing.  And hold firm on this as your son or daughter makes their plea for the $100 pair of jeans or $70 shirt.

To help your child start learning about what the cost of livings is, put them in charge of part or the entire  budget.  How much should be determined by the age and maturity of that child.  A child in their teens should be responsible for their entire school budget.  A preteen can be put in charge of part of the budget.

The hard thing is to then let go of that part of the decision making.  If your child is given $100 to manage, you need to not interfere if they choose to spend it all on one pair of pants.  If this means that they will only have one pair of new pants for the school year, so be it.  If this means that they have to wear last year’s clothes the rest of the time. so be it.  You need them to learn the lesson of living with their choices.  If you bail them out by purchasing additional items after they have spent their budget, they are learning that they do not have to be responsible with their money since you will be there to help them out.

Some suggestions on trying to steer them in the right direction (but not forcing them in that direction):

1 – Agree to match the number of items.  If they purchase 4 items you will purchase 4 additional items for a maximum cost of XX.  If they only get one, you only purchase one more.

2 – Agree to provide additional dollars for items purchased on sale or clearance.  For example, if your daughter saves XX dollars due to purchasing items on sale, you agree to give 25% of the savings in additional money to  spend.  A savings of $50 would generate an additional $10 to spend.

3 – Agree to double or increase by a certain percentage the amount spent at a consignment or thrift store.  If you son spends $25 at the local consignment store, you will provide him with an additional $25 to spend at the consignment store.

4 – Agree to double or increase by a certain percentage the amount that a child receives for taking clothes to a consignment or secondhand store.  So if your daughter gets $100 for clothes that she no longer wears, you agree to provide $50 extra towards the clothing budget.

5 – Hold a swap meet for your child and their friends.  This allows them to get new clothes for themselves by trading and getting clothes they have seen their friends wear and love.  Make sure it is a large enough circle of friends to insure that there are sizes for everyone to swap with.  It can be helpful to invite friends’ older and younger brothers and sisters to add more sizes if they are close in age.

The key with these suggestions is to make sure you still stay within your school clothing budget that was set for each child.  If your child is looking for additional clothing money, provide suggestions on ways that they can earn money.  They can do extra work for you that they will get paid for, get a job or putting themselves out for hire to neighbors and others.

Determine a budget and stick to it!

Some hear the word annuity and automatically shun away.  Too expensive.  Too restrictive. The planners selling them are only wanting the higher commission.  There are times when annuties are sold that are inappropriate.  Before you consider making a purchase make sure you understand what you are getting.

There are two primary types of annuities – fixed and variable.  These can then be further divided by immediate and deferred.

Fixed annuities work very similar to a CD.  You are paid a fixed rate of interest, sometimes guaranteed for a year, three years or whatever period offerred.  Currently, many fixed rate annuitiesare paying a higher rate than what you can get for a CD  right now.    The interest rates are low like CDs but not as low because of the interest rate environment. 

Fixed rate annuities are not in the stock market so there is no volatility.  This is key.  If you are naturally adverse to the stock market or are in a position of needing a guaranteed rate of return, a deferred fixed rate annuity may be the right thing for you.

Generally there is a surrender period.  If you take the money out of the annuity early you will often have to pay a penalty.  You need to know when putting money into an annuity you should generally plan on leaving it there for seven years or more.  You may have access to 10% or 15% each year without being subject to the penalty.   You also have the additional advantage that you will not pay taxes on the earnings until the money is taken out of the annuity.  Fixed rate annuities may have an annual fee although this will often be waived at a certain investment level. 

A fixed rate annuity can be either immediate or deferred.  An immediate annuity means that you start to begin receiving payments right after making the investment.  Often to provide a guaranteed lifetime income, you elect to receive a payment from this annuity for life.  Many times the payment can be indexed for inflation.  So – the payment may be $100 the first year and with a 5% inflation feature it become $105 the second year then $110.25 the third year and so on.  As long as you keep living, the annuity keeps paying.  You can elect to have the annuity payout over the lifetime of a second individual also.

You can elect to receive a payment for a certain time-period.  Maybe you need money when forced into early retirement at age 55 so you elect a immediate 7 year fixed annuity to make payments to you until you turn 62 and can collect Social Security.  Maybe you want a 10 year payment until the mortgage is paid in full.  Generally you must elect any period of five years or greater. This is a great way to guarantee the money will be there and not have to worry about a drop in the market.

Consider putting enough into a guaranteed stream of income to insure that basic expenses will always be covered and be sure to put in the inflation feature.  This may allow you to be a little more aggressive with the balance of your portfolio since you know this is for the extras.

Make sure with your immediate annuity that there is the feature that you will get at least your principal back in case you die before the original invested amount has all been distributed.

A deferred annuity says that you do not wish to receive payments now.  The money will sit there, earning interest tax deferred until you are ready to begin disbursements.  You can at any time elect to just take a lump sum out, pay the tax on the earnings and spend the money as you wish.  Note, there may be a surrender period before you can take it out without a penalty.  Or you can turn it into an immediate annuity and start receiving payments for life.

Certainly annuities are not for everyone, but there are times when they can be very appropriate – times when you want that guarantee.

As parents we want the best for our children.  I am fielding many calls in my office right now from concerned parents whose financial situations have changed since their child was accepted to a college, the FAFSA form was filled out and the aid package was accepted.  Maybe you have been laid off.  Maybe you were forced into an early retirement.  Maybe you had to take a pay cut or a number of hours cut.  Something has decreased the amount of your income.

First things first, call the financial aid office for the college where your child is about to go to school, either as an incoming freshman or as a returning student.  While it may not be possible to change the amount of federal aid that your son or daughter is getting this year, it is possible that the school may have some private aid it can use to increase the financial aid package.  They may have alumni who have set up a scholarship fund.  There may be scholarships that were previously awarded and were not accepted because the student chose not to attend that school.  There may be hardship money available for a semester or two.

Some schools will require you to complete a “special circumstances” form to have aid reconsidered.  Certainly do this, but also make the human contact, it can mean a lot of difference for the financial aid officer to hear what is going on and realize the potential severity of the situation.

Second, have your child head out looking for scholarships.  I do not recommend paying for a scholarship search, there are so many places they can find them for free.  Consider fastweb, collegeboard, scholarshipsearch and Sallie Mae’s scholarship listings on Upromise.com.  This can be a time consuming process, but it also can mean some dollars in your pocket.  Watch the deadlines and make sure that the time for applying has not passed since many have already been awarded.

Third, consider whether or not it would be appropriate to remove some funds from a retirement plan to help pay tuition this year.  You would have to pay tax on the distribution, but it would not be subject to the early distribution penalty if being used for education purposes.  Consider this option carefully.  If you remove this money, what does it do to your retirement?  Will you still be able to retire when you want?  Are you going to need this money potentially for living expenses if long term unemployment occurs?  Is it really the right thing to do?

Fourth, it is probable that you will qualify for a Parent Plus loan.  Parent Plus loans are the responsibility of the parent to pay back.  You can borrow up the cost of education.  Generally to qualify they are not looking at credit score, they are more concerned if there is a bankruptcy in your past.  If there has been a bankruptcy within the last 6-12 months you generally will not qualify.

And last – consider does there need to be a change in plans?  Many unemployed individuals are finding it takes a year or longer to find a job.  If you are in that situation, can you afford to make a loan payment under the Parent Plus option?  Can you afford to take a hit on your retirement especially if you are not going to be able to contribute for the next year or more?  Do you need to have the student head to work to help support the family?

Do  not keep your children in the dark.  Let them know what you are experiencing and ask for their assistance.  Maybe they go to the community college for a year while you get back on your feet.  Maybe they delaying going for a semester or even a year.  Maybe they go part-time and work more to help cover the expenses.

Most kids are not going to want to put their parents in a much worse financial position just so that they can attend a particular school.  Keep them involved and let them help.