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.

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.

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!

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.

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.

Many societies consider negotiating a natural part of the buying process.  Maybe we should follow their attitude.  Think about how much money you could save if everything was at a 5% discount.  It would give you the ability to have more money to purchase other items, how could that be bad?  It might provide the ability to save money for a long term goal such as retirement or a college education.

Start thinking of it this way – you are creating your own sale.  Stores put items on sale all the time to move them out so that inventory can turnover.  To get rid of items that may be damaged or out of style.  To provide room for new items.    Maybe an item is not on sale this week.  Was it on sale last week?  Is it going to be on sale next week?  In both cases, the store manager may be grateful to get rid of an item now.How many stores offer a price match guarantee?  Is this not a type of negotiation to get you to purchase a product there rather than at a competitor?

If you are getting a quote for services and consider it too high, why not try to compromise?  The individual providing the service needs to make money so you should not ask for a 40% or 50% discount, but why not a 5% or 10% discount?  For the contractor that 5% may be the difference between having a job to do that week and receiving no money at all that week. 

If you feel uncomfortable asking for a discount, then give something up in return and consider it an exchange.  Maybe for the contractor he would be willing to accept that discount if the services were performed during his off-season.  Maybe the store manager would be willing to discount the item if you purchased two of them thereby increasing his profitability.  Maybe you agree to pay cash and save the store from having to pay the merchant fees on a credit card transaction.

Anything should be considered negotiable. 

If the bananas are starting to turn brown, you know they are going to have to thrown them away soon so wouldn’t the store be better off selling them at a discount.  If a product is near its expiration date would they rather sell it at a discount than not at all. 

Doctors are continually willing to write off co-pays that create a burden for patients.

Your local cable or telephone company is probably always running sales to attract new clients.  They are often willing to give those same discounts for the asking to try and retain a current client – it costs them less to retain a current customer than to try and win over a new one.

If you are willing to visit your hairdresser, therapist, chiropractor or other service professional during their slow time, would they not rather have that income at a discount than no income at all?  As a tax preparer, I will often offer discounts to a clients who goes on extension and files after April 15th.  It gives me the time to put in a full-pay client during the tax season time and still have income after the season.

If it is the end of the month, the end of the quarter or the end of the year oftentimes there are quotas that need to be met and the salesman may be willing to make the sale rather than be under-quota for the period. 

Start small and get comfortable negotiating.  Just because a manager says no does not mean everyone will.  If the first one says no, try a second or third.  There are thousands of people out there not paying full price for anything.  Why shouldn’t you be one of them?

There is also the concern that not all assets will receive a stepped-up value.  Previously, if a person passed away with stocks, mutual funds, rental property or some other type of investment where the value had increased the heirs received the value at the date of death rather than what the deceased originally paid for it.  Now there is talk that a stepped up basis would only partially apply and an executor would have to allocate which investments received the stepped up basis and which did not.  Or there is the possibility that no assets would receive a stepped up basis.

All that is in flux right now and we are waiting to see what is decided.  What you do you need to do is make sure that your documents are in order and up-to-date.  What documents are these:     up-to-date will, Power of Attorney, Health Care proxy, possibly a trust or multiple trusts and a living will.

The will names your executor, the person who will insure that bills are paid, any assets necessary are sold and that the remaining assets are dispersed per your wishes.  One of the key components of a will is to name a guardian for any minor children – the person or people who will raise and financially care for them.   This document is also the catch-all to allow for anything to be dispersed that is not specifically left in another manner such as through a trust or named beneficiary.

You may find yourself in need of a trust or multiple trusts. You may want a special needs trust to place assets for care of a disabled child.  You may want to place money into a trust to be dispersed over a period of time to children, either minor or adult that you feel cannot responsibly handle receiving a large lump sum.  You may need A-B trusts between you and your spouse to avoid estate tax issues.  You may need a life insurance trust to hold a policy to assist in paying estate taxes without it becoming part of the estate.  There are over 100 different types of trusts and a good estate planning attorney can help you determine the appropriate ones, if any for you.

You need a current power of attorney.  Due to changes in some states with their power of attorney forms, you may want to insure that yours is up-to-date with the last revision of your state.  For example, New York State dramatically changed its POA on September 1, 2009.  If your POA is older than that in NYS you should consider having it re-done.  The POA allows someone to manage your financial affairs if you are unable to perform those duties.  It might be necessary to use a POA because you are going to be away from home and a signature is needed, you are ill or injured and unable to pay bills, or any number of other situations.

A health care proxy gives someone the authority to make medical decisions if you are unable to make those decisions.  This is the person who will determine if a particular measures are consistent with your wishes.  For example, you do want to be kept alive if in a vegetative state such as a coma.  You need to make sure that this person is aware of what your wishes are and what measures you want taken and not taken.  Some health care institutions are not accepting health care proxies  that are more than five years old, so consider updating yours if done before 2005.

A living will is similar to the health care proxy in that it states what you wish and do not wish for medical care.  The intent is to provide your phyicians and health care proxy with the knowledge of what you wish and do not wish in terms of medical care if you are incapable of explaining them at the time.

All these documents are legal documents.  There are the means of doing them online without the assistance of an attorney.  In the case of easy, straight forward answers this can be an affordable method of  getting these documents in place.  However, if you are dealing with more complicated issues, with declaring guardians, with setting up trusts a good estate planning attorney can be invaluable.

Some of items of concern:

To cut down on the cost of dispersing your final assets and settling your estate, which is called probate, you should consider getting everything possible to transfer outside the estate.  Be sure to name beneficiaries on all retirement accounts and life insurance policies – and make sure to keep those beneficiaries up-to-date.  On investment accounts you can put the designation of “TOD”, transfer on death to the named individual.  On bank accounts you can put the designation of “POD”, payable on death to the named individual.  The TOD and POD means that the individual has no access to these accounts now, but will receive the remaining assets upon your death.

Beneficiaries should be up-dated whenever a life changing event occurs – a marriage, a divorce, a death, a birth or other similar events where you might want to re-think who is to receive those assets.

Avoid making your estate the beneficiary unless you have a specific reason for doing so.  Having the estate as the named beneficary puts that asset into the estate and forces disbursement through the estate, thereby incurring probate costs.

Make sure that your executor knows where your will is and can get a hold of  a copy.  Make sure your physician and health care proxy have copies of the health care proxy and living will documents.  Safety deposit boxes get sealed upon death so having those documents in that box creates a whole host of problems.

And finally, as your minor children reach the age of majority, you need to make sure these documents are in place for them.  Once they reach majority, you no longer have the automatic right to make those decisions for them.  It needs to become a legal right.

Dealing with estate issues can be hard to do.  The alternative can be far worse if you become incapacitated or pass away without them in place.

Are all those cable channels necessary?  Maybe go to basic cable and then add NetFlix to make sure you have more than enough to watch.

Is it necessary to have both a landline and a cell phone?  If everyone in your family has a cell phone is the cost of a land line really a necessity or can you get by with just the cell phones?

Tell your doctor you refuse to take anything but a generic drug.  He will find one for you!  He has no incentive unless you notify him that you need generics because you cannot afford the name brand ones.

Find coupons on the Internet for products you use regularly.  Do not get a coupon to “try a product” unless you would try it without the coupon.

Pay your loan payments and credit card payments more often.  Think about it, if you make a payment every 2 weeks how much less is the interest than one payment made during the month?

Try either a formal bartering exchange or simply just barter for services to keep available cash.  Trade your skill at carpentry with someone’e skill to fix your car.

Try living on cash only every other day or every other week.  You will realize where your money is going more and begin to take the steps to curb it.

If you are looking for more money saving tips, look at the Finances for Everyday website for special reports on saving money.

Years ago, students got out of school with $10000 or maybe $20000 worth of student loan debt.  Now, for some students that debt is $100,000 or $200,000 – yes that is an extra zero on each of those.  Is it worth it?

There are many students coming out with a Liberal Arts degree or a general business degree that have no idea what they want to do or how much they can make with that degree.  Let me go through a scenario that happened in my office a month or so ago:

Parents and their Senior (we will call her Ann) came into my office.  Ann wanted to go to XXX College at a cost of about $45,000 per year.  She knew precisely where she wanted to go and what she wanted to do.

Parents and Ann were in a position of not qualifying for any grants or free aid.  Parents had no savings for college and were still paying off their own student loans so were not in a position to borrow for their daughter.

So – we calculated if Ann borrowed 100% of her education costs for 4 years at the average interest rate, she would be looking at a $930 per month student loan payment for 10 years to pay back her loan.  Add in some rent, a car payment, cell phone, utilities and normal living expenses she would be looking at needing to make about $70,000 per year to pay her loan payment and live on her own.  From her first year out of school!

Now I posed the question, what you do want to do?  I want to do what my mother does, Ann replied.  Turning to Mom, I asked her what she made per year.  ”Well, I have been there about 20 years and make less than $55000 per year”, Mom replied.

This is the trouble kids and parents get in when they do not think about after graduation.   So many parents sign Parent Plus loans thinking the student will pay it after graduation.  But the students are unable to pay so parents cannot retire because they are stuck making loan payments.

How do you prevent this or lessen the burden?

• Consider community college or a 2 year junior college for the 1st 2 years.  They are more reasonably priced.  And how many employers will care where your Associates Degree is from, they want to know where your Bachelor’s Degree or Master’s Degree is from.
• Overload on courses to get through in a shorter period of time.  Many kids are taking 5 years to get a 4 year degree.  Do not let your child be one of them.  Make sure they are taking enough courses and do not drop too many.
• Consider summer school online at the school of your choice or take a class or two at the local college to get through in less time.
• Challenge courses so that you can to try and avoid having to pay for a class on something that you are already proficient in.
• If you have to take student loans, pay the interest on the loans rather than letting it add to the balance.  Think about it, if you add the interest to the balance then you end up paying interest on the added interest over and over again.  You can make payments much more reasonable after graduation if you make interest payments now.
• Require your child to look for scholarships for at least one or two hours a week.  Try Fast Web.com or Scholarship Search.com.  Do not pay for a scholarship service, you can find more than you could possibly fill out from by doing an Internet search.
• Consider having your child take a year to work first to earn his/her tuition or to go part time.  This can be especially useful if the student does not know what they want to do.

And the hardest of all – you may need to just put your foot down and say NO you cannot do go there.  I cannot pay for that and will not put you in that position.  If you as the parent put your foot down and you are the only co-signer of a loan, then your son or daughter will either figure out how to pay for it without loans or will decide maybe it is time to look somewhere less expensive to go.

The main point of the HIRE Act is for employees hired after February 3rd through the end of the year an employer does not have to pay his portion of Social Security on qualified employees.

A qualified employee is someone who has worked less than 40 hours in the previous 60 days.  The employee is required to sign an affadavit that he is an eligible employee.  This affadavit is currently being developed by IRS and should be available soon.

The qualified employee cannot be replacing another employee unless that previous employee was fired for cause or left on his own.

Eligible wages are those that were paid after March 18, 2010 and through the end of the calendar year.

A new 941 has been developed which will allow for the reduction from first quarter as well as the second quarter reduction when filing the June 30th report.  An employee may elect to reduce down payments made during the quarter for employees that he will not have to pay the 6.2% tax on.

The Medicare tax is not excluded, only the Social Security portion for the employer.  Both Social Security and Medicare taxes must be withheld from the employee.  The employee will continue to get the benefit as if the taxes had been paid.

The second benefit under the HIRE Act is that if the employer keeps the employee for at least one year, when filing their 2011 tax return they will be eligible for a $1000 general business credit.

For those businesses using a payroll service, they are well aware of this change.  If you do your own payroll, make sure that you learn all the ins and outs before filing your June 30th 941 payroll form.

Why should you be concerned as a potential employee?  Watch that you do not put yourself in a position of the employer not being able to claim that exemption by being just a few hours over the 40 limit.  If you qualify under the HIRE Act as a qualified employee, then make sure those interviewing you are aware that you do.

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