Boost Retirement Income, Minimize the Risk
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Q. An elderly widowed relative of mine barely scrapes by month-to-month with absolutely nothing left over. Aside from Social Security, she has a small savings account worth about $30,000 and a house that's paid for and valued at $150,000. It just breaks my heart to see her pinch pennies. Is there anything she can do to increase her monthly income? -- Pam, LaGrange, Ky.
A. Before I get to some suggestions, you and your relative need to understand that trying to squeeze more income from limited resources always comes with some risk, even if it's not readily apparent.
For example, many retirees trying to get more than the ultra-low interest rates available on savings accounts and CDs these days are turning to long-term bonds, junk bonds or even mutual funds and ETFs that focus on dividend-paying stocks. By pursuing those loftier payouts, however, they are putting their principal at greater risk of losses.
So you want to be careful that your well meaning attempt to help your family member doesn't end up jeopardizing the little financial security she has now.
With that in mind, there are ways your relative may be able get some additional income from her two major assets: her $30,000 savings account and the$150,000 she has in home equity.
Let's start with the savings account. Given that your relative has no other investments or cash to fall back on for emergencies and unexpected expenses, her first concern should be keeping this thirty grand safe. That means keeping all or nearly all of it in FDIC-insured accounts. Unfortunately, that also means having to accept a low rate of return.
Related: Why do I need an emergency fund, and how much do I need?
Still,she may be able to do better than the average yield of 0.5% or so that banks pay on savings accounts. By comparing rates on sites like Bankrate.com and MoneyRates.com, she could get as much as 1% or so on FDIC-insured savings and bank money-market accounts (not to be confused with mutual fund money-market funds).
She can do a bit better -- say, 1.25% or more -- by putting a small portion of the thirty grand into a one- or two-year CD (although she should do that only with funds she won't need over the next 12 to 24 months).
These moves aren't going to shower her with tons of extra income. But earning 1% to 1.25% a year on $30,000 instead of 0.5% translates to an extra $150 to $225 a year, which may be enough to provide your relative with a bit of breathing room or, if nothing else, the occasional small splurge.
She can boost her spending cash even more by devoting a portion of her $30,000 to an immediate annuity, a type of investment that provides guaranteed payments for life.
The size of those payments depends on your age, interest rates, your gender (women get lower payments than men because they live longer on average) and the amount you invest. But today, a 75-year-old woman who buys a $10,000 immediate annuity would receive lifetime payments of about $70 a month, or $840 a year, well above what she can get by keeping the same sum in a savings account or CD.
There's a downside to doing this, however. Once she puts her money into an immediate annuity, she no longer has access to that cash. She receives only the monthly payments. That's why anyone considering an immediate annuity should be sure to leave plenty of assets outside the annuity for emergencies.
Your elderly relative has a chance to get a lot more extra cash, however, by tapping the $150,000 of equity in her home.
She can do that by taking out a reverse mortgage, which would give her either a lump sum, monthly payments or a line of credit or a combination of these options.
The amount of money you can get from a reverse mortgage varies based on where you live, the value of your home and your age. A 75-year-old with a home worth $150,000 that has no mortgages or liens might qualify for a reverse mortgage of up to $100,000 or so.
The upside: Your relative can get the cash now and won't have to repay the loan until she dies or moves out the house. But there are also some drawbacks.
One is cost. Reverse mortgages come with some pretty substantial fees. Even though you don't have to pay them upfront, they drive up the effective interest rate on the loan, especially if you die or move out of the home shortly after taking out the loan. A relatively new variation on the standard reverse mortgage comes with lower costs, but the tradeoff is that you get a smaller loan.
Reverse mortgage borrowers are also required to pay homeowners insurance premiums and property taxes and keep the house in good condition. If that would be a problem for your relative -- or if she was hoping to leave the home as a legacy to any heirs -- then a reverse mortgage probably isn't a good choice.
Given the complexity of reverse mortgages and the potential for abuse by unscrupulous advisers who may recommend one of these loans even if you don't need it, the government requires that would-be borrowers work with a counselor before taking out one of these loans. But however well intentioned that prerequisite may be, a recent report from the Consumer Financial Protection Bureau warns that the counseling isn't always up to snuff.
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So if a relative is seriously considering a reverse mortgage, she ought to consider paying an independent financial adviser a flat fee or per hour charge to take a look at the terms (and also weigh in on any moves your relative plans to make with her $30,000 savings account) as an added precaution. To mitigate any conflict of interest on the adviser's part, your relative should also make it clear that she won't be buying any product or service from the adviser. She's seeking advice only.
There are any number of moves your elderly relative can take to give her more financial wiggle room. The key, though, is to make these moves judiciously and cautiously, so she doesn't end up having to pinch her pennies even tighter down the road.