Money in the Media #4

A Paradigm Shift: The End Of Inheritance For The Middle Class

While it was not a Monday release, Wednesday isn’t such a bad compromise. This week we are taking a look at the article from Forbes.com “A Paradigm Shift: The End Of Inheritance For The Middle Class” by Patricia Barnes. This article touches on one of the many dangers facing today’s middle class. In addition to the predatory lending strategies that make the middle class more likely to accrue debt, many will most likely never receive an inheritance that previous middle class generations had always counted on in order to give them their own boost into retirement.

While many had never received a large number of assets in the form of remaining investment accounts, what about the family farm? This is now up for debate. The culprit? The reverse mortgage industry.

What Is A Reverse Mortgage?

A reverse mortgage allows homeowners over the age of 62 to tap into the stash of cash sitting in their home equity. This can be paid out in monthly payments, as a lump sum or a line of credit. Sounds pretty good, right?

It gets better. There are NO MONTHLY PAYMENTS and the monthly payments received by the homeowner are TAX FREE. Wait a minute. What? How does this all get paid back?

A reverse mortgage will be paid back in a lump sum at one of the following times:

• When the home is sold.
• When the owner of the reverse mortgage permanently leaves the home, which means once they have not lived in the home for 12 months. This includes nursing home stays that last longer than a year.
• When all of the owners of the reverse mortgage passes, which is where our story lies.

It’s important to note the difference in saying when the owners of the home pass or permanently leave the home versus the owners of the reverse mortgage. This means that if both spouses are listed on the title for the home, but only one of them is on the reverse mortgage the other spouse risks losing the home to pay back the reverse mortgage.

Retirement Planning

Now knowing what a reverse mortgage is, it’s easy to understand the lure of one for older homeowners. According to Barnes:

Older parents are taking advantage of reverse mortgages to pay off credit cards and to escape poverty and debt. This reduces equity in the home and often leads to foreclosure, leaving traditional heirs with nothing but memories.

The current retirement planning crises is having a domino effect to the following generations once an expected inheritance is removed from the equation. The current generation of older Americans have insufficient funds to make ends meet or end up in debt after meeting their bare minimum expenses.

The use of reverse mortgages can help to cover the gap in their monthly expenses, but it also decreases the equity in the family home and increases the debt owed on the property. This can become devastating if those heirs were expecting an inheritance to help them with their own debts or retirement savings.

Financial Crisis Recovery

While a reverse mortgage may help struggling seniors, it may not fix more dire financial straits. The home can still be foreclosed on if the homeowner falls behind in paying taxes and insurance. According to a USA Today investigation, reverse mortgages were not able to keep nearly 100,000 families from losing their homes. These numbers mostly affecting those least likely to be able to pull themselves back out of it: those living at or below the poverty line in major cities like Baltimore, Chicago, Miami and Philadelphia.

In the fall of 2008, America was thrown into a recession rivaling that of the great depression. Thousands, if not millions, lost their jobs, their homes and the final remaining shreds of security they once had. Those who were physically able, had to take minimum wage positions just to make ends meet until the time that they were no longer able to work and had to rely on Social Security to get by.

The average Social Security benefit in 2019 was $17,532 but the actual benefit is far lower for women and minorities due to pay gaps, discrimination and other challenges. These groups also tend to lack pensions and savings. The Social Security Administration says 43% of single Social Security recipients aged 65+ depend on Social Security for 90% or more of their income. 

Since Social Security benefits are based on the income that was produced during the 35 highest earning years, the gender and race pay gaps come back into pay once again. If 90% of a beneficiaries’ income comes from the $17,532/year they received in Social Security, they are living on $19,500/year, or about $1,625/month. At that rate, every single penny counts and needs to be accounted for in their budget.

In the face of all of this, it becomes even easier to see how a reverse mortgage can be seen as a saving grace for many of these hardworking families.

What Can I Do?

For the systemic issues, you can speak with your vote by supporting representatives that back legislation to help increase these benefits, but that’s all I will say on the political side of this issue.

At the ground level, I recommend that you talk to your parents. Do you know where they are financially? Do they know how they want their retirement to look? How far are they from making it a reality in relation to their finances? How much of their retirement will rely on Social Security? you can check their expected benefits (and yours) here.

Once you know the answers to these questions, you can take a look at what it would take to close the gap between where they are and where they want to be. If you are unsure of what that path needs to be, contacting a financial coach or fee only adviser may be the right step for you.

In some cases, a reverse mortgage can be a good thing as it removes the responsibility of the cost of current living expenses from the children or other caretakers of older Americans. However, everyone must be on the same page so that the traditional heirs will know ahead of time that they will not be receiving an inheritance from the sale of the family home.

I am in this same boat as my parents will not have anything left by the time they pass and my mother may actually be a good candidate for a reverse mortgage when the time comes. My personal plan forward is to ensure that not only is my family set that we will not need anything from them, but to work to build up our finances where we are secure enough to help as much as possible.

Have you had this talk with your parents? Are you all on the same page for their retirement? Let me know in the comments below!