The first advantage of a reverse mortgage is that it allows you to borrow from your home equity without having to pay it back for as long as you live there. But it's a costly way to access your home equity. Here, I consider why it's costly, who might best use a reverse mortgage and other options to access home equity.
The Home Equity Conversion Mortgage (HECM) is FHA's reverse mortgage program. To qualify you must be at least 62 years old and own your home. This program allows you to borrow a fraction of your home equity. That fraction increases the older you are when you apply.
As a rough estimate, a borrower in his or her early 60's may get about 38% of the home's equity, at 75 about 58%, and someone in his 80's about 60%. And you don't have to pay it back as long as you live in that home.
The total amount owed when you do leave your home is subtracted from the then current value of your house. And, importantly, you - or your children - will never owe more than the value of the house. That's the other key advantage of the reverse mortgage.
You can take what you borrow as a lump sum, a credit line, or monthly payments for a term or for life; it's up to you. But realize you're borrowing this money at a rate of interest that's fixed or variable depending on your contract. And since you're not paying anything back, the debt you owe - i.e. what you've borrowed along with the interest charged - is increasing fast. As an example, at a 7% borrowing interest rate, what you owe will be double what you borrowed in just 10 years.
Reverse mortgages come with a hefty amount of fees, too. These include an origination fee, closing costs, mortgage insurance premium, and servicing fees. You can finance these through your loan as well. They'll simply take them out of your lump sum, or credit line - leaving you with less to use of what you've borrowed.
The mortgage insurance premiums guarantee that you'll get all expected loan advances and not have to repay the loan for as long as you live in your home. It also guarantees that your total debt to you or your heirs will never be greater than the value of your home when you sell it. But recognize that you're paying for this.
But all those fees including accruing interest rate charge will cut into a lot more of your home equity than the fraction you were allowed to borrow. And it can do it fast which is why your original borrowing fraction is restricted.
Unless your home is continually appreciating at a good clip, it won't take long until there's little of no equity left as a legacy when you die or move out. This is what makes reverse mortgages so costly to you and you're loved ones.
If leaving a legacy is not an issue and you've the health to live on your own for 10 or more years, then a reverse mortgage may be a reasonable option for you. But if you want to leave a legacy, consider alternative ways to access the value of you home for income. Here are a few:
Renting a portion of you home:
If your home has extra bedrooms you may want to rent a room out for the income it can bring you. You may even consider borrowing a little for creating an in-law apartment for renting. This allows you to remain in your house yet use it to create some income. You may find local programs that allow you to borrow cheaply for the renovation needed.
Sell Your Home to Your children:
Your children can pay you a monthly payment toward ownership of your house. You could arrange that you'd have a right to live in it as long as you live. What better way to have your cake and eat it too - leaving all that equity to your children for the payments made to you.
Sell Your Home And Pay for an In-law at your child's house:
Here, you'll have to move out of your home, but you get to live with your children, increase the value of their home, and have money from your home sale that you can live on -and leave as a legacy.
Sell and Buy-down:
Again, you have to move out of your home, but if you buy down to a condo much better adapted to your age and needs, your extra equity from you home sale can perhaps supply sufficient income for you to live on. You may want to buy a life annuity with it too.
Always consider every option thoroughly.
Tuesday, June 30, 2009
Retirement Planning
This is the first article coming in the Retirement Planning series that IndianMoney.com is publishing for our readers. Today we will discuss about the meaning, importance and advantages of Pension Planning. Our objective is to make aware all the people about the importance of Retirement Planning. We are sure that after reading this series of articles you will be able to take a better decision on your Retirement Planning.
Retirement is one of the major important life events many of us will ever experience. From both a personal and financial viewpoint, realizing a comfortable retirement is an extremely extensive procedure that takes sensible planning and years of perseverance. Even once it is reached; managing your retirement is an ongoing accountability that carries well into one's golden years. Although all of us would like to retire happily, the difficulty and time required in building a successful retirement plan can make the whole procedure seem nothing short of daunting. However it can often be done with fewer headaches (and financial pain) than you might think - all it takes is a little homework a possible savings and investment plan and a long-term commitment. A pension plan is an assurance by a pension plan sponsor to a plan member to supply a pension after your retirement. In this article we'll break down the procedure needed to plan implement, execute and eventually enjoy a comfortable retirement. Retirement planning basically is planning for a stable income after retiring from regular work. It is an investment choice where the returns are allocated after a gestation period. Individuals investing in retirement profit schemes usually earn pension over an extended period. Planning for retirement earning is best done throughout the course of regular job or practice. Saving frequently is the initial step towards planning for investment. The earlier an individual starts saving the higher is the amount of investment possible. All investments yield interest and rate of interest earned on longer terms generally outweighs inflation rates. Two important kinds of pension plans Generally a Pension Plan is a way in which an employee transfers part of his or her current income stream towards the retirement income. There are two main kinds of pension plans: Defined-benefit plans Defined-contribution plans. Defined-benefit plans In a defined-benefit plan the employer guarantees that the employee will be given a definite amount of benefit upon retirement regardless of the performance of the underlying investment pool.
Defined-contribution plans. In a defined-contribution plan the employer makes predefined contributions for the employee but the final amount of benefit received by the employee depends on the investment's performance. In common a pension is an agreement to provide people with an income when they are no longer earning a regular income from employment. The terms retirement plan or superannuation refer to a pension settled upon retirement. Retirement plans may be set up by employers, Insurance companies, the government or other institutions such as employer associations or trade unions. Retirement pensions are classically in the form of a guaranteed Annuity. A pension created by an employer for the benefit of an employee is commonly referred to as an occupational or employer pension. Labor unions, the government or other organizations may also fund pensions. Occupational pensions are a form of deferred compensation generally beneficial to employee and employer for tax reasons. Many pensions also contain an insurance aspect since they often will pay benefits to survivors or disabled beneficiaries while annuity income insures against the risk of longevity. Other vehicles may provide a similar stream of payments. The general use of the term pension is to explain the payments a person receives upon retirement usually under pre-determined legal and or contractual terms. A receiver of a retirement pension is known as a pensioner or retiree. Types of pensions Employment-based pensions (retirement plans) Social / state pensions Disability pensions Employment-based pensions (retirement plans) A retirement plan is an agreement to provide people with an income during retirement when they are no more earning a steady income from employment. Often retirement plans require both the employer and employee to contribute money to a fund throughout their employment in order to receive defined benefits upon retirement. Funding can be provided in other ways such as from labor unions, government agencies or self-funded schemes. Pension plans are therefore a form of deferred compensation.
Nuclear families The days are gone when people use to have a complete cricket team making a family. Today's youth prefer not more than two children. With westernization coming in, the traditions of joint family are changing. They prefer freedom and stay away from their family. Therefore people have to develop a corpus to last them during their retirement without any help from family. Inflation As you require worrying about it you need to account for it as well. You need to take into account inflation while calculating your retirement corpus as well as your returns. Job hopping With youngsters hopping jobs frequently they do not get benefit of plans like super annuity and gratuity. Both these require certain number of working years spent in the service of an exacting employer. No government sponsored pension plan Unlike the US and UK where they have IRA (Individual Retirement Arrangement)and state pension respectively as social security benefit during retirement, the government of India does not give such benefits. So again it is your responsibility to fund your Retirement. While this may not be probable starting your retirement planning when young is. It is not needed to start with a bang. You can start with small amounts and raise it as your salary increases. Also if you start early and you have time with you, you can gain benefit of high returns and maximize your investments by investing in equities or equity mutual funds.
Inflation adjusted rate of return/Real rate of return (in percentage) After calculating your retirement requirement the next step would be to find the amount essential to save to reach there. The components involved to derive this figure are: Rate of return during accumulation stage (in percentage) Existing invested corpus Number of years to retirement Steps involved in determining the requirement for Retirement Plan Step 1: It is very significant to work out the intended expenses after retirement. Planned expenses vary from individual to individual and from one city to another. Step 2:Listing of present wealth and investments gives an indication of the gap accessible between the actual earning potential and the preferred expenditure Step 3:After identifying this gap plan investments hence which take closer to your preferred expenditures Step 4:The risks concerned in these future investments are of fundamental consideration. Step 5: A constant review of available investments helps to mix and match future retirement income plans. Retirement advantage investment plans are offered by banks, non-banking financial institutes and government agencies. In many countries post offices also expand retirement investment plans. How to find the size of savings you'll need in order to fund your retirement The reason behind listing these components is to clarify that it is not merely accumulating Rs. 1 crore for retirement. The right retirement corpus is one which helps you preserve your standard of living even after retirement. There are several key tasks you require to complete before you can decide what size of savings you'll need in order to fund your retirement. These include the following steps: Step 1: Choose the age at which you want to retire. Step 2: Decide the yearly income you'll need for your retirement years. It may be wise to estimate on the high end for this number. Normally speaking it is reasonable to assume you'll need about 80% of your current annual salary in order to maintain your standard of living. Add up the current market value of all your savings and investments. Step 3: Determine a practical annualized real rate of return (net of inflation) on your investments. Conservatively assume inflation will be 4% annually. A realistic rate of return would be 6-10%. Step 4: If you have a company pension plan, gain an estimate of its value from your plan provider. Step 5: Estimate the value of your social security profit. Two things to Remember about Pension Plans Give every year to your pension fund; you might want to skip a year's payment thinking that skipping a year will not make much of a difference. You might be wrong. Systematic investment instills discipline and this is a key to accumulating a bigger corpus.
Resist the temptation to withdraw. If you are not capable to contribute after 15 years since of some personal problems do not remove money from your retirement savings and let it grow for the next 15 years unless in case of extreme emergency.
Planning for your retirement is an on going process. It requires discipline, self study and time. The earlier you start the better it is as you can gain from the power of compounding as well as aim for a higher return. Mediclaim is one of the main important aspects of planning. Remember that medical expenditures are never foreseen. Mediclaim supports us in emergencies. At times it may not be enough but it certainly offers a buffer. So it is very important to check that your Mediclaim premium is paid every year and it does not lapse. Sources of Income to Invest Following are the important sources of income, which will help you to invest in pension funds. Employment income Employer-Sponsored Retirement Plan Current Savings and Investments Other Sources of Funds Employment Income As you grow through your working life, your yearly employment income will possibly be the largest source of incoming funds you receive and the major component of your contributions to your retirement fund. For your retirement plan simply mark down what is your after-tax yearly income is. Then deduct your annual living expenses. The amount left over represents the discretionary savings you have at your removal. Depending upon how the numbers work out you may be capable to save a large part of your employment income toward your retirement or you may only be capable to save a little. Be sure to use a budget and comprise all your recurring expenses. One way to guarantee you save the projected amount for retirement is to treat the amount you plan to save as a recurring expense.
Employer-Sponsored Retirement Plan You may or may not join in a retirement plan during your employment. If you don't, you will require focusing on your other income sources to fund your retirement. If you do participate in an employer plan contact your plan provider and acquire an estimate of the fund's value upon your retirement. Your plan supplier should be able to give you an estimated value of your retirement funds in terms of a monthly allowance. Obtain this number and add it to your list of retirement income sources. Similar to your social security profit the funds from your employer plan can help cover your living expenses during your retirement. However most employer plans have rules regarding the age at which you can start receiving payments. Even if you quit working for your company at age 50. For example your employer plan may not permit you to begin receiving payments until age 65. Or they may allow you to start receiving payments early but with a penalty that reduces the monthly payment you receive. Talk to your plan provider to decide what rules apply to your employer plan and consider them when you are making your retirement plan. Current Savings and Investments Also consider what current savings and investments you have. If you previously have a great investment portfolio, it may be enough to cover your retirement needs all by itself. If you have yet to start saving for your retirement or are coming into the retirement planning game late, you will require to compensate for your lack of current savings with greater ongoing contributions.
Other Sources of Funds You might have other sources that will be obtainable to fund your retirement needs. Perhaps you will get an inheritance from your parents before you reach retirement age or have assets, such as real estate that you plan to sell before retiring. Whatever additional sources of funds you do happen to have been sure to comprise them in your retirement projections only if they are certain to occur. You may be expecting to realize a large inheritance from your parents but they may have other plans for their surplus savings such as donating them to charity. Other unexpected cash inflows may also come along as you build toward your retirement such as lottery winnings, gifts, raises or bonuses, etc. When you do occur to receive these additional cash inflows, believe adding them to your retirement fund. Major ways through that you can contribute to your Retirement Plan are: 1. Unit Linked Pension Plans (ULPP) 2. Traditional Pension Plans 3. Systematic Investment Plans (SIP) 4. Reverse Mortgage 5. Public provident Fund (PPF) 6. Provident Fund (PF) In the next article we will discuss the feature, benefits, types and comparison of Unit Linked Pension Plans (ULPP) with other kinds of Pension Plans. For more details do visit our website..... IndianMoney.com
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Retirement is one of the major important life events many of us will ever experience. From both a personal and financial viewpoint, realizing a comfortable retirement is an extremely extensive procedure that takes sensible planning and years of perseverance. Even once it is reached; managing your retirement is an ongoing accountability that carries well into one's golden years. Although all of us would like to retire happily, the difficulty and time required in building a successful retirement plan can make the whole procedure seem nothing short of daunting. However it can often be done with fewer headaches (and financial pain) than you might think - all it takes is a little homework a possible savings and investment plan and a long-term commitment. A pension plan is an assurance by a pension plan sponsor to a plan member to supply a pension after your retirement. In this article we'll break down the procedure needed to plan implement, execute and eventually enjoy a comfortable retirement. Retirement planning basically is planning for a stable income after retiring from regular work. It is an investment choice where the returns are allocated after a gestation period. Individuals investing in retirement profit schemes usually earn pension over an extended period. Planning for retirement earning is best done throughout the course of regular job or practice. Saving frequently is the initial step towards planning for investment. The earlier an individual starts saving the higher is the amount of investment possible. All investments yield interest and rate of interest earned on longer terms generally outweighs inflation rates. Two important kinds of pension plans Generally a Pension Plan is a way in which an employee transfers part of his or her current income stream towards the retirement income. There are two main kinds of pension plans: Defined-benefit plans Defined-contribution plans. Defined-benefit plans In a defined-benefit plan the employer guarantees that the employee will be given a definite amount of benefit upon retirement regardless of the performance of the underlying investment pool.
Defined-contribution plans. In a defined-contribution plan the employer makes predefined contributions for the employee but the final amount of benefit received by the employee depends on the investment's performance. In common a pension is an agreement to provide people with an income when they are no longer earning a regular income from employment. The terms retirement plan or superannuation refer to a pension settled upon retirement. Retirement plans may be set up by employers, Insurance companies, the government or other institutions such as employer associations or trade unions. Retirement pensions are classically in the form of a guaranteed Annuity. A pension created by an employer for the benefit of an employee is commonly referred to as an occupational or employer pension. Labor unions, the government or other organizations may also fund pensions. Occupational pensions are a form of deferred compensation generally beneficial to employee and employer for tax reasons. Many pensions also contain an insurance aspect since they often will pay benefits to survivors or disabled beneficiaries while annuity income insures against the risk of longevity. Other vehicles may provide a similar stream of payments. The general use of the term pension is to explain the payments a person receives upon retirement usually under pre-determined legal and or contractual terms. A receiver of a retirement pension is known as a pensioner or retiree. Types of pensions Employment-based pensions (retirement plans) Social / state pensions Disability pensions Employment-based pensions (retirement plans) A retirement plan is an agreement to provide people with an income during retirement when they are no more earning a steady income from employment. Often retirement plans require both the employer and employee to contribute money to a fund throughout their employment in order to receive defined benefits upon retirement. Funding can be provided in other ways such as from labor unions, government agencies or self-funded schemes. Pension plans are therefore a form of deferred compensation.
Nuclear families The days are gone when people use to have a complete cricket team making a family. Today's youth prefer not more than two children. With westernization coming in, the traditions of joint family are changing. They prefer freedom and stay away from their family. Therefore people have to develop a corpus to last them during their retirement without any help from family. Inflation As you require worrying about it you need to account for it as well. You need to take into account inflation while calculating your retirement corpus as well as your returns. Job hopping With youngsters hopping jobs frequently they do not get benefit of plans like super annuity and gratuity. Both these require certain number of working years spent in the service of an exacting employer. No government sponsored pension plan Unlike the US and UK where they have IRA (Individual Retirement Arrangement)and state pension respectively as social security benefit during retirement, the government of India does not give such benefits. So again it is your responsibility to fund your Retirement. While this may not be probable starting your retirement planning when young is. It is not needed to start with a bang. You can start with small amounts and raise it as your salary increases. Also if you start early and you have time with you, you can gain benefit of high returns and maximize your investments by investing in equities or equity mutual funds.
Inflation adjusted rate of return/Real rate of return (in percentage) After calculating your retirement requirement the next step would be to find the amount essential to save to reach there. The components involved to derive this figure are: Rate of return during accumulation stage (in percentage) Existing invested corpus Number of years to retirement Steps involved in determining the requirement for Retirement Plan Step 1: It is very significant to work out the intended expenses after retirement. Planned expenses vary from individual to individual and from one city to another. Step 2:Listing of present wealth and investments gives an indication of the gap accessible between the actual earning potential and the preferred expenditure Step 3:After identifying this gap plan investments hence which take closer to your preferred expenditures Step 4:The risks concerned in these future investments are of fundamental consideration. Step 5: A constant review of available investments helps to mix and match future retirement income plans. Retirement advantage investment plans are offered by banks, non-banking financial institutes and government agencies. In many countries post offices also expand retirement investment plans. How to find the size of savings you'll need in order to fund your retirement The reason behind listing these components is to clarify that it is not merely accumulating Rs. 1 crore for retirement. The right retirement corpus is one which helps you preserve your standard of living even after retirement. There are several key tasks you require to complete before you can decide what size of savings you'll need in order to fund your retirement. These include the following steps: Step 1: Choose the age at which you want to retire. Step 2: Decide the yearly income you'll need for your retirement years. It may be wise to estimate on the high end for this number. Normally speaking it is reasonable to assume you'll need about 80% of your current annual salary in order to maintain your standard of living. Add up the current market value of all your savings and investments. Step 3: Determine a practical annualized real rate of return (net of inflation) on your investments. Conservatively assume inflation will be 4% annually. A realistic rate of return would be 6-10%. Step 4: If you have a company pension plan, gain an estimate of its value from your plan provider. Step 5: Estimate the value of your social security profit. Two things to Remember about Pension Plans Give every year to your pension fund; you might want to skip a year's payment thinking that skipping a year will not make much of a difference. You might be wrong. Systematic investment instills discipline and this is a key to accumulating a bigger corpus.
Resist the temptation to withdraw. If you are not capable to contribute after 15 years since of some personal problems do not remove money from your retirement savings and let it grow for the next 15 years unless in case of extreme emergency.
Planning for your retirement is an on going process. It requires discipline, self study and time. The earlier you start the better it is as you can gain from the power of compounding as well as aim for a higher return. Mediclaim is one of the main important aspects of planning. Remember that medical expenditures are never foreseen. Mediclaim supports us in emergencies. At times it may not be enough but it certainly offers a buffer. So it is very important to check that your Mediclaim premium is paid every year and it does not lapse. Sources of Income to Invest Following are the important sources of income, which will help you to invest in pension funds. Employment income Employer-Sponsored Retirement Plan Current Savings and Investments Other Sources of Funds Employment Income As you grow through your working life, your yearly employment income will possibly be the largest source of incoming funds you receive and the major component of your contributions to your retirement fund. For your retirement plan simply mark down what is your after-tax yearly income is. Then deduct your annual living expenses. The amount left over represents the discretionary savings you have at your removal. Depending upon how the numbers work out you may be capable to save a large part of your employment income toward your retirement or you may only be capable to save a little. Be sure to use a budget and comprise all your recurring expenses. One way to guarantee you save the projected amount for retirement is to treat the amount you plan to save as a recurring expense.
Employer-Sponsored Retirement Plan You may or may not join in a retirement plan during your employment. If you don't, you will require focusing on your other income sources to fund your retirement. If you do participate in an employer plan contact your plan provider and acquire an estimate of the fund's value upon your retirement. Your plan supplier should be able to give you an estimated value of your retirement funds in terms of a monthly allowance. Obtain this number and add it to your list of retirement income sources. Similar to your social security profit the funds from your employer plan can help cover your living expenses during your retirement. However most employer plans have rules regarding the age at which you can start receiving payments. Even if you quit working for your company at age 50. For example your employer plan may not permit you to begin receiving payments until age 65. Or they may allow you to start receiving payments early but with a penalty that reduces the monthly payment you receive. Talk to your plan provider to decide what rules apply to your employer plan and consider them when you are making your retirement plan. Current Savings and Investments Also consider what current savings and investments you have. If you previously have a great investment portfolio, it may be enough to cover your retirement needs all by itself. If you have yet to start saving for your retirement or are coming into the retirement planning game late, you will require to compensate for your lack of current savings with greater ongoing contributions.
Other Sources of Funds You might have other sources that will be obtainable to fund your retirement needs. Perhaps you will get an inheritance from your parents before you reach retirement age or have assets, such as real estate that you plan to sell before retiring. Whatever additional sources of funds you do happen to have been sure to comprise them in your retirement projections only if they are certain to occur. You may be expecting to realize a large inheritance from your parents but they may have other plans for their surplus savings such as donating them to charity. Other unexpected cash inflows may also come along as you build toward your retirement such as lottery winnings, gifts, raises or bonuses, etc. When you do occur to receive these additional cash inflows, believe adding them to your retirement fund. Major ways through that you can contribute to your Retirement Plan are: 1. Unit Linked Pension Plans (ULPP) 2. Traditional Pension Plans 3. Systematic Investment Plans (SIP) 4. Reverse Mortgage 5. Public provident Fund (PPF) 6. Provident Fund (PF) In the next article we will discuss the feature, benefits, types and comparison of Unit Linked Pension Plans (ULPP) with other kinds of Pension Plans. For more details do visit our website..... IndianMoney.com
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Some Facts About Selling Settlements
Before you decide to begin a search for companies that buy structured settlements you should consider what is involved in the process. Often, insurance companies offer a structured settlement rather than an immediate pay out of cash. Under a structured insurance settlement, the insurer promises to pay money in regular installments over a period of time. Typically selling your future structured settlement payments will require a legal process.
The insurance company is ordered by a court to pay you or your family over a period of time. Insurance companies typically fund these awards by purchasing annuities. The annuity therefore belongs to that insurance company and not to you, meaning you cannot sell the annuity. You can however sell the rights to receive future payments You can sell this asset on terms that you negotiate with a third-party buyer, or companies that buy structured settlements.
In most cases selling a settlement will require a court review. Simply put a court ordered the payments and therefore a court will have to rule in favor of selling future payments.
The court's legal review examines the person's financial circumstances, and the arguments in favor of selling future annuity payments. You would have to show that your interests would be better served by an immediate lump sum of cash, compared to the inflexible terms of the existing annuity.
The process will seem impossible throughout and it is advised to find a settlement specialist to help through the process. There are benefits to a lump sum payout and there are advantages to extended payments. The individual should decided what is the best approach to take. Laws may vary state by state so proper research is needed before you make a hasty decision.
Life can throw unexpected surprises at you everyday and your needs may have changed since you were awarded the settlement. The court generally had your best interest in mind when the award was made. You would do well to consider all factors before proceeding with your settlement sale
The insurance company is ordered by a court to pay you or your family over a period of time. Insurance companies typically fund these awards by purchasing annuities. The annuity therefore belongs to that insurance company and not to you, meaning you cannot sell the annuity. You can however sell the rights to receive future payments You can sell this asset on terms that you negotiate with a third-party buyer, or companies that buy structured settlements.
In most cases selling a settlement will require a court review. Simply put a court ordered the payments and therefore a court will have to rule in favor of selling future payments.
The court's legal review examines the person's financial circumstances, and the arguments in favor of selling future annuity payments. You would have to show that your interests would be better served by an immediate lump sum of cash, compared to the inflexible terms of the existing annuity.
The process will seem impossible throughout and it is advised to find a settlement specialist to help through the process. There are benefits to a lump sum payout and there are advantages to extended payments. The individual should decided what is the best approach to take. Laws may vary state by state so proper research is needed before you make a hasty decision.
Life can throw unexpected surprises at you everyday and your needs may have changed since you were awarded the settlement. The court generally had your best interest in mind when the award was made. You would do well to consider all factors before proceeding with your settlement sale
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