Unfortunately, some grandparents are put in the very difficult position of raising their grandchildren. There are various reasons as to why this is the case. One thing is for sure, this reality transcends socioeconomic lines. Let’s take a look at a way that I recently helped a pair of grandparents that found themselves in this precarious situation. For the purpose of this blog, I will call our client’s the Martins. The Martins became guardians of their granddaughters two years ago. The oldest age 16 and the youngest age 13. Mr. Martin age 68 and Mrs. Martin age 67 were not anticipating that they would need to raise children during retirement. However, when they were called upon, they stepped up to the plate and I commend them for that. Here is how the Martin’s were set up for retirement. The Martin’s receive $4,200 a month in combined social security benefits. They had paid for their home along with all other debt. They fully paid for an automobile that would hopefully see them through the majority of their retirement and had around $50,000 in cash savings. They also had saved $275,000 in their pre-taxed retirement accounts. This allowed them to live a reasonable lifestyle. Their goal was to live within their
means and use the $50,000 in cash savings for larger unforeseen expenses. They wanted to leave their IRA intact without withdrawals for as long as possible so that it could continue to grow until they began taking their required minimum distributions. Needless to say, their plans had to be recalibrated once they became the guardians of their granddaughters.

The average cost of raising a child according to the Institute of Family Studies is a whopping $1,438 dollars a month! So, its not surprising that over the last two years the Martins have spent down $35,000 of their cash reserves. Once they realized that the rate at which they are spending is unsustainable, The Martins started exploring solutions for their dilemma. First, they looked at a traditional cash out refinance of their home. Then they explored a traditional home equity line of credit. They quickly understood that obtaining more debt in the traditional manner was not the solution that would work for them. They needed additional cashflow plain and simple. This is where Mortgage South of Tennessee was able to provide a solution that fit their situation.

The Martins called me and gave me a brief synopsis of their situation. They scheduled an appointment and I gathered some more detailed information from them. Once my analysis was complete, I provided a potential solution with a HECM (also known as the federally insured reverse mortgage). First, I wanted the HECM to provide much needed positive cash flow to the situation so, I created a monthly distribution to them of $2,000 a month for a specific period of time. In their case, I proposed 5 years because the youngest granddaughter would be 18 at that time. Next, I used the reverse mortgage to create additional emergency funds that would be there for the inevitable home repair, etc. This would give them the peace of mind that they still had $15,000 remaining in cash and another $95,000 in their new found HECM emergency fund. This reverse mortgage solution allowed the Martins to add $24,000
of positive nontaxable cashflow to their family budget until their youngest granddaughter reaches age 18. It also created a HECM line of credit of $95,000 for emergencies, and finally allowed them to keep their original plan in place of not tapping into their taxable IRA account until it was time to start taking their mandatory distributions from their qualified IRA. A federally insured HECM reverse mortgage will not provide the correct solution for every situation, but when it does, it is a game changer for retirees trying to navigate a world that has become increasingly more financially complicated.

 The news on the financial front for folks in retirement is both good and bad. Let’s have some good news first. Those retirees who have been fortunate enough to have owned a home and or have saved for their golden years, have in many cases experienced as much as a 40% increase in their real estate asset values.  Also, they can finally receive favorable interest rates on certificate of deposit accounts. I’ll give you an example. My mom is a retired schoolteacher. As a single mother, she raised my brother and I on modest pay. She never was able to save above what was taken out for social security and her state provided pension program. Fortunately, the state of Georgia currently provides a nice pension benefit, so she lives comfortably now and even saves money each month. She is in her late 70’s and lives alone and independently. A few health scares and the ever-present maintenance needs of her long-term residence caused her to recognize that it was time for a transition. So, with the help of my brother and I, she listed her home and sold it at the peak of the post covid real estate frenzy. She now rents a very affordable and nice single level cottage from longtime friends she had developed from her church.  Her rent is well below the national average for a property of this type, so after running the numbers, renting made a lot of sense for her situation. She cleared $240,000 from the sale of her home. After paying off her car and adding $20,000 to her cash reserves, she wanted to place the balance of her funds in interest bearing accounts. She has no investment experience, so her risk tolerance is very low. With the help of a financial advisor, we laddered her funds in FDIC insured CD’s. She will average 5.3% for 3 years from the start of the plan. My mother is ecstatic about a $30,000 gain over 3 years with no risk! It’s been well over a decade since anyone with savings could reap this type of benefit.

Now let’s face the bad news. Retires are faced with inflation and borrowing cost at a forty and twenty year high respectively. Social Security benefits have increased thanks to the cost-of-living adjustments of 5.9, 8.7 and 3.2% in the years 2021-2023.  The aggregate increase of 17.8%, while helpful, doesn’t fully offset the increased cost of the inflation ratchet. For this blog post, I will highlight the impact of inflation on transportation. According to Edmunds’ latest data, the share of 1,000+ monthly car payments has reached 17.5% in Q3 of 2023. That’s up from 17.1% in Q2 of 2023 and a massive increase from the meager 4.3% back in 2019. The average car payment in Q3 of 2023 reached a record high of $736 per month for new cars, up 4.5% since Q3 of 2022 and a 32% increase from 2019! Meanwhile, the average monthly car payment for used cars is $567 making a 46% rise from 2019! So, I believe it is apparent that an individual in retirement has a lot of trepidation when it comes to the prospects of purchasing the highest priced ticket items outside of a new home. Let’s not forget, this is just one sector of the economy that has seen massive increases in cost due to inflation.  Inherently retirees are on some type of fixed income. Whether it is a standalone social security benefit or a combination of social security and other savings. The number is finite. So, this leaves many of them and the people that advise them searching for ways to offset inflation in order to maintain the standard of living and essential services that they have grown accustomed to. One way to help alleviate this is by using the federally insured HECM, also known as the reverse mortgage loan as a solution. Let’s cover the process step by step. The first step is education. I sit down with my clients and ask a series of questions that help me understand how they are positioned financially. Then I will explain the ins and outs of the reverse mortgage loan. Once the program has been fully explained and all questions are answered, I ask my clients to express any concerns they have for their current and or future financial needs. The next step is catering a solution for their specific situation.

Now, let’s look at an example of how I helped a particular client utilize a HECM or reverse mortgage loan to purchase a new vehicle and provide additional resources for future retirement needs.  For this blog, I will call my client Henry.  Henry owned a small business here in Chattanooga, TN. He enjoyed his work until his early 70s. He had to close his business because the technology had changed dramatically, and it did not make sense for him to invest in updating the equipment needed to keep his business going. Henry had saved around$300,000 in his tax deferred IRA.  He also had a paid for home that is located in a very sought after area of Chattanooga. He called my office because he was interested in finding out how or if a HECM reverse mortgage could improve his current and future financial standing. During our initial conversation, Henry mentioned that his car was in good shape, but it lacked the safety features that he thought were important for him to have as he becomes an aging driver. He wanted to purchase a car with the features but didn’t want to increase his taxable withdrawals from his IRA to do so. So, I went to work for him and created an option that allowed him to tap his home equity in a unique way to accomplish his goals. His home appraised for $530,000. This allowed him to have a total of $230,000 in available reverse mortgage proceeds. Now the neat part of this is how funds were disbursed to him in a way that met his needs. First, I provided a monthly disbursement of $765.00 per month for 6 years. This provided funds to cover the purchase of a new car that provided him with all the safety options he desired and covered the increase in his auto insurance premium. Second, I provided a HECM or reverse mortgage line of credit of $181,000 that grows over time regardless of the fluctuations in housing values. All monthly disbursements and the line of credit are federally insured. So, Hennery can rest assured that his transportation and future retirement needs are now standing on solid ground.