If your parents are at least 62 years of age and have significant equity in their home, a reverse mortgage can turn that equity into tax-free cash without forcing them to move or make a monthly payment.

If it’s right for them, it’s a worthwhile financial tool. If not, they could make some serious mistakes with their financial future.

A reverse mortgage gets its name because of the way it works. Instead of the borrower making payments to the lender, the lender releases equity to the borrower in a number of forms:

• A lump sum cash payment;
• A monthly cash payment;
• A line of credit (which tends to be the most popular option);
• Some combination of the above.

When the owner dies or moves away, the house can be sold, the loan paid off and any leftover equity value can go to the living owner or the designated heirs.  Heirs don’t have to sell the house. They can either pay off the reverse mortgage with their own funds or refinance the outstanding loan balance within six months with the option of two 90-day extensions that must be applied for.

There are three basic types of reverse mortgages:

• Single-purpose reverse mortgages, which are offered by some state and local government agencies and nonprofit organizations;
• Home Equity Conversion Mortgages (HECMs) are federally insured reversed mortgages backed by the U. S. Department of Housing and Urban Development (HUD);
• Proprietary reverse mortgages are private loans that are backed by the companies that develop them.

The size of a reverse mortgage is determined by the borrower’s age, the interest rate and the home’s value. The older a borrower, the more they can borrow, but the amounts are capped by the maximum FHA loan limit for each city and county.

Reverse mortgages have traditionally been chosen by older Americans who can’t cover everyday living expenses or who otherwise need cash for such things as long-term care premiums, home healthcare services, home improvements or to pay off their current mortgage or credit card greater than their income can support. More recently, though, they’ve become popular with individuals who see them as a better alternative to home equity lines. Some use the proceeds to supplement monthly income, buy a car, fund travel and second homes and evaluate with the help of a financial adviser if reverse mortgage funds can be used to restructure estate taxes.

Elderly borrowers will have to consult with a financial advisor before they’re granted this loan – that’s one of the requirements. They should consider a Certified Financial Planner ™ professional to do this because reverse mortgages can be complex and risky. This step can be completed within the first few days of the process. The basic loan closing now takes place in about 30-40 days from the date of application. Generally the only out-of-pocket cost is an appraisal fee ranging from $300- $500.

Here are other things to consider:

Cost can be substantial: Reverse mortgages are generally more expensive than traditional mortgages in terms of origination fees, closing costs and other charges. The basic FHA-backed HECM loan finances these fees into the initial loan balance, and they can run between $12,000-$18,000. The loans are based on anticipated home value appreciation of 4 percent a year, so if the housing market is healthy, those costs are generally recovered in a short period of time. But if the housing market sours, it will definitely take longer to recoup those fees.

They’ll need to make sure they’re not endangering their Federal retirement benefits: The basic FHA HECM is designed as tax-free income to the senior receiving their Social Security income. However, if their total liquid assets exceed allowable limits under federal guidelines, they might endanger your benefits. This is another critical reason to work with a financial adviser on this decision.

Rates can be higher: Reverse mortgages have rates that are typically higher than those charged on conventional mortgages. Interest is charged on the outstanding balance and added to the amount they owe each month.  Again, check the total annual loan cost.

Their mortgage can be called: The homeowner or estate always retains title to the home, but if they fail to pay your property taxes, adequately maintain their home, pay their insurance premiums, or change their primary residence, the lender can declare the mortgage due or reduce the amount of monthly cash advances to pay those overdue amounts.

The family needs to talk. If your parents’ house is their major asset, getting involved in a reverse mortgage may not leave much to the next generation – if it appreciates, there may be some difference that the kids can have. That’s why that in addition to discussing a reverse mortgage with a financial adviser, parents and their adult children need to talk with their family.

August 2009 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Kristine McKinley, a local member of FPA.

If you are retired and receiving Social Security benefits, you know that your benefits are increased each year to help you keep up with inflation.  This is called a cost of living adjustment, or COLA.  The COLA is announced in October of each year and is based on the CPI-W (the Consumer Price Index for Urban Wage Earners and Clerical Workers) from the 3rd quarter of the previous year to the 3rd quarter of the current year.  Changes announced in October go into effect in January of the next year.

In 2009, retirees saw their benefits increase by 5.8%, due mainly to the high cost of gas during 2008.  This was much higher than normal, with the average increase being around 2.8%.  Unfortunately, the Congressional Budget Office (CBO) is estimating that there will be no increase in Social Security benefits for the years 2010 through 2012.

The reason that there may not be any COLAs for the next few years is a law that says that no further COLAs may be given until the CPI-W exceeds the level on which the previous adjustment was based.  Since gas prices have gone back down, the CPI-W has also decreased and is not expected to get back to the level it was at (when the 2009 COLA was announced) until the year 2011.

If you’re already receiving Social Security, you probably are also aware that Medicare Part B premiums have also been rising.  Thankfully, there is good news for the majority of retirees who have their premiums deducted from their Social Security checks.  There is a “hold harmless” provision that says that Social Security retirement benefits will not decrease as a result of an increase in the Part B premium.  So even if Social Security benefits stay the same and Part B premiums increase, your Social Security check will not go down.

However, the “hold harmless” provision does not apply to new Social Security recipients, Medicare participants who are not yet receiving Social Security benefits and high income people.  If you are unfortunate enough to fall into any of these groups, you’ll pay higher premiums to make up for the participants who are covered under the “hold harmless” rules.  This may seem unfair, but this scenario (where Social Security does not receive a COLA but Medicare premiums are rising) was never expected to happen, because it was never expected that Social Security would not receive a cost of living adjustment since they were made automatic in 1975.

The reason high income earners will see higher Medicare premiums is due to the Medicare Modernization Act, which will be completely phased-in this year.  This act basically says that high income beneficiaries will pay a larger portion of the cost of Medicare, based on their income.  While this act is not the focus of this article, the combination of the Medicare Modernization Act with no COLAs for Social Security retirement benefits could mean smaller Social Security checks for people above certain income levels for the next few years.

Bottom line, if you’re collecting Social Security you’re going to learn the true meaning of “fixed income” over the next few years.  To prepare you should keep a close eye on your spending, and if you’re a high income earner you should be aware of tax and financial planning strategies that could cause a spike in income and thus a spike in your Medicare costs.  These strategies need to be carefully planned and coordinated so that your increase in Medicare costs don’t outweigh the benefits of the planning strategies.

Summer’s actually a good time to do this task because there’s still enough time to correct lapses in savings, spending or tax planning. Here’s what most people should cover:

Retirement savings:
Given the state of the economy, it’s not a bad time to review your retirement funds and your current investment allocation. If you are on schedule to max out your contributions to your company retirement plan this year, great. But don’t forget to check your existing IRAs and other retirement accounts to see if you’ll have enough cash on hand to contribute the maximum in each account by their respective deadlines next year.

Taxes:
If you got a sizable refund in April or found it necessary to empty savings to pay Uncle Sam, it’s definitely time to reassess what you’ll owe at tax time next year.  Also, if you think you’ll have some losing stocks in your taxable investment accounts, keep an eye on those in case you’ll need to offset gains in your portfolio at the end of the year.

Spending:
Either on your computer or on paper, take the time to figure out where you’re money’s going.  A look at the last six months of spending may reveal opportunities to reduce spending and redirect money toward more necessary goals. Also, take a look at such things as gym memberships, magazines that are piled up and coffee expenses. If you’re not using these things, you can probably live without them. Doing this exercise can identify a surprisingly large amount that’s unaccounted for that can be redirected to debt payment, savings and investments.

Emergency fund:
Most financial experts encourage you to have between three and six months of living expenses in an emergency fund.  If you don’t have that minimum, go back to your spending review and see where you can start socking money away.  In addition, with credit being tight and jobs being unstable, it might be a good idea to increase your emergency fund even more – six to twelve months of living expenses is becoming the standard rule of thumb in this economy.

College savings:
If you are saving for your child’s education or your own, check to see if you’re on track with the goals you made for the year. It’s also a good idea to read the latest news on financial aid since schools change their financial aid policies annually.  Even if your kid’s still in grade school, it’s a good idea to learn as much about college financial aid while you’ve got plenty of time to learn.

Special goals:
If your car is suddenly looking like it will need to be replaced or if this might be the last year for your furnace, see if you can direct more money into a reserve fund to cover replacement costs or at least a heavy down payment. If there’s a vacation you want to take by the end of the year or a special household purchase you want to make, focus on the cash you’ll set aside to make that happen.  Of course, if you have credit card debt rolling over from one month to the other, maybe that should be your initial focus.

Credit:
If you haven’t set a schedule for receiving your three credit reports throughout the year, do it now. You have the right to get all three of your credit reports – from Experian, TransUnion and Equifax – once a year for free. You can do so by ordering them at www.annualcreditreport.com. By staggering receipt each of your credit reports at different points in the year, you’ll get a continuous picture of how your credit picture looks. Also, you’ll have the opportunity to focus on possible errors in a single report, which will give the other two credit agencies time to update their files.

This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Kristine McKinley, a local member of FPA.

Will Social Security be there for me when it’s my time to collect benefits?

For a long time the media has been telling us that Social Security is going bust. Millions of Americans depend on Social Security to fund all or part of their retirement, so this is a huge concern in our country. So do we really need to worry about Social Security going under before we start collecting our retirement benefits?

The 2009 Social Security Trustees Report anticipates that Social Security benefits paid to retirees will exceed Social Security taxes paid in by workers (and earnings on the funds in the trust) beginning in 2016.  In addition, the trust fund could be exhausted by 2037.  Once the trust fund is gone, benefits will still be paid out, but the taxes collected from people still working will only be enough to cover 76% of the benefits promised.

We will probably see several reforms in the future, including a higher retirement age, decreased benefits for future retirees, etc.  Social Security may not look the same as it does now for future generations, but it’s too important to our country to let it fail.

How much can I expect to receive?

An important part of planning for retirement is knowing what resources you will have to help cover living expenses once you retire. For some people Social Security is their only retirement income; for others it’s a small part of their retirement, as they will have pensions and investment income in addition to Social Security. Whatever your situation is, you need to have a good understanding of how much income you will receive from all sources so you can adequately plan for your retirement years.

How much Social Security you receive will depend on several things, such as when you retire, how many years you worked and how much you earned, among other factors.

Generally, your benefits are calculated by applying a formula to your top 35 years of earnings, indexed for inflation. Once your benefit is calculated, it is reduced by up to 25% for people who retire before their full retirement age, and increased by 8% per year for people who wait until after their full retirement age to start collecting benefits. To estimate your benefits, you can use the retirement benefit calculators at the IRS website.

When should I sign up for Social Security?

Probably the most commonly asked question is “when should I sign up for Social Security”? By now, you’re aware that you will receive lower benefits if you apply for Social Security before your full retirement age. The question is, are you better off applying early and receiving benefits for more years, or will you benefit more if you wait until age 66 or later to apply?

How can I get the maximum benefits?

Your parents and grandparents probably never wondered how they could maximize their Social Security benefits, but you should. Because it’s an income stream for life, and because it is increased each year for inflation, Social Security is much more valuable than most people realize. There is nothing wrong with using the Social Security rules to your advantage.

Will my Social Security retirement benefits be enough to live on?
Social Security was never meant to fund 100% of your retirement. It was designed to supplement other income streams (pensions and annuities) as well as your retirement savings.  So you should not expect Social Security to be enough to cover all of your living expenses in retirement. On average, Social Security constitutes about 40% of their income.

It’s hard to say what 2009 will look like. While there are still several concerns (the housing market, rising unemployment, etc.), there will also be considerable government intervention to help improve the economy this year, both in the U.S. and worldwide.

So what should you do in 2009 to make your portfolio and overall financial picture better? Here are some general ideas to employ as markets and economies hopefully stabilize in the New Year:

Start with a plan (or review an old one): If you’ve worked with a financial planner in the past, now is a good time to review your plan to make sure you are still on track to meet your goals. If you haven’t worked with a financial planner before, or if you haven’t prepared a financial plan before, it might be time to meet with a Certified Financial Planner™ to create a plan. Much of the riskiest investing, overbuying and panic selling during the late 1990s and early 2000s could have been avoided if individual investors had sought advice for achieving long-term specific goals such as retirement or a college education.

Check all your assets in banks: As a result of federal economic bailout legislation, the Federal Deposit Insurance Corporation (FDIC) temporarily raised the per-deposit account, per bank coverage level from $100,000 to $250,000 through Dec. 31, 2009. Certain retirement-related accounts carry $250,000 of FDIC coverage, but again, check in with your bank to make sure you’re covered, and if not, get the right advice for moving funds so you don’t incur an unexpected tax liability or fees.

Review your risk tolerance: Having a plan doesn’t mean make the plan and leave it to sit for years. You and your planner should decide when it’s time for a review of your investment goals and your feelings about them. An annual conversation makes sense if nothing’s going on, but when unusual circumstances in life or the markets take place, a phone call might be a good idea.

Prepare to stay invested: Stock downturns are always filled with panic selling – and buying. If your financial plan is sound, be prepared to stay the course, but work with your advisor to make sure you have your priorities covered. While times are tough, it’s wise to examine all your investment choices, but if they make sense, definitely put what you can afford in. You’ll reap rewards when the market returns.

Check your credit: No one knows how long it might take to unravel the nation’s current credit situation. That’s why creditworthy individuals might want to delay looking for new lines of credit until things loosen, and it’s definitely a good time to schedule review of each of your latest credit reports at staggered intervals throughout the next year. Why? Because in tough economies and times of tight credit, identity theft might be on the rise, and you’ll need to make sure the information on your credit data is truly your own.

Pay attention to your cash: You should have an emergency fund of three to six months’ worth of living expenses in case your job situation goes south, but the market turbulence we’ve experienced also highlights the need to be somewhat liquid in your investment positions so you can take advantage of certain opportunities. Not every investment that’s lost value is necessarily a bad investment, and with careful study, you should be able to have cash on reserve so you can capitalize on legitimate opportunities.

Re-budget: It’s a good time to make a budget or re-assess the one you have. Though the federal government would love for consumers to start spending again to lift the economy, that doesn’t mean you have to jump in with both feet. Keep your spending smart, your debt low so it’s easier to set savings and investment priorities that will do you the most good when the economy and the market come back.

Check your retirement: How will the activity in the market affect your retirement timetable? You might want to continue working full-time or plan a phased-in approach as you continue to build assets. There is a great danger now that people may become either too risk-adverse or assume too much risk in planning for their retirement, and that’s why it’s wise to get advice.

December 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided (and edited) by Kristine McKinley, a local member of FPA.

Here’s what Walter Updegrave with Money Magazine has to say about this:

But as understandable as the urge may be to transfer all your money into the investments that seem safest – stable value funds, capital preservation funds, money market funds and the like – that would be a mistake.

Yes, you have the option of switching back into stock and bond funds later on. But getting the timing right is difficult, if not impossible. You could easily end up missing the early stages of a market rebound, which would make it even harder for your 401(k) to regain lost ground.”

Updegrave goes on to say that now may be a great opportunity to take a more comprehensive review of your retirement planning strategy.  While you should review your retirement plan on a regular basis anyway, it’s even more important after a bad year like 2008 to make sure you’re still on track to retire on time.

Updegrave has three retirement resolutions for investors for the new year:

Resolution #1: Kick up your savings a notch

For example, if someone 35 years old who makes $40,000 a year and gets 3% annual raises contributes 10% of salary to a 401(k) that earns 7% a year, that person would have $535,000 by age 65. But if the markets whack that 401(k) for a 25% loss on the eve of retirement, its value would fall to just over $400,000, requiring this would-be retiree to significantly scale back his retirement lifestyle or postpone retiring altogether.

But if this person had socked away just two percentage points more a year, or 12% of salary, he’d have a 401(k) worth about $642,000. That same 25% hit would drop his account’s value to roughly 482,000. While still a big loss, he might be able to retire on schedule by scaling back his spending a bit rather than postponing retirement altogether. Or he might not need to put off retiring for as long.

The point is that by saving more during your career, you’ll end up with a larger nest egg than you otherwise would, which gives you more maneuvering room if the markets turn against you or, for that matter, if you find you’re forced out of the workforce sooner than you would like.

Resolution #2: Create an actual retirement plan

Clearly, there are lots of moving parts here, so you can’t nail down all these variables with decimal-point precision. But you can make reasonable estimates. You can then fine tune your planning as your circumstances change and as you near retirement (and even once you begin living it).

Resolution #3: Resist the impulse to overreact when the markets go haywire

This is probably the hardest resolution to keep. The point of having a comprehensive plan is to set you on a course that can lead to a secure retirement even though the economy and financial markets will go through major upheavals along the way.

You can’t predict these ups and downs in advance or insulate yourself from them entirely. But a plan based on reasonable savings and realistic investing should allow you to roll with the economic punches and improve your chances of reaching retirement with the resources you’ll need.

The problem is sticking with the plan. When the markets take a dive as they have over the past year, there’s a natural tendency to feel you must take quick action to protect your nest egg. The same impulse to act arises when the markets soar to absurd heights as they did in the late 90s. Unfortunately, following these urges usually leads to trouble. It makes us more apt to invest too conservatively after a market setback and more likely to take on too much risk when the market is approaching unsustainable highs.

So once you’ve gone to the trouble to create a plan, don’t be so quick to dump it. Review it? Sure. Maybe you were overconfident when you originally set your stocks-bond mix, in which case you might want to re-think your asset allocation and re-assess how much you should be saving.

But if you abandon your plan whenever the economy slumps (or soars) or the stock market crashes (or takes off), then you don’t really have a plan at all. You’re winging it, which is the same as entrusting your retirement security to luck.”

You can read the complete article here: http://money.cnn.com/2009/01/05/pf/expert/retirement_resolutions.moneymag/index.htm?postversion=2009010609

The notice provides that the new February due date established under a recent law change to provide Form 1099-B information to customers also applies to other tax information customarily reported to customers with Form 1099-B statements, such as interest and dividends.  This means that customers can expect to receive Forms 1099-INT and 1099-DIV late as well.

If you normally receive Forms 1099-INT, 1099-DIV and 1099-B for investment income and transactions, be aware that these forms will arrive later than usual this year.  Some clients have reported that they have received letters from financial institutions saying not to expect these forms until the end of February (although the official due date is February 17).

As a tax preparer, I’m not particularly happy about this change, but on the bright side, I’m hoping the extended deadline will cut down on the number of corrected 1099s issued this tax season.

This increase will boost the average monthly Social Security retirement check from $1,090 to $1,153.

Even more good news… for the first time since 2000, Medicare premiums will not go up in 2009.  Currently the Medicare Part B premium is $96.40 per month.

This is good news for Seniors who have seen their portfolios plunge over the last 15 months.  If possible, you should use this increase to reduce the amount you are withdrawing from your portfolio, to give it more time to recover recent losses.

Congress approved legislation this week that will provide some relief to Americans over 70 1/2 who have suffered significant losses in their IRA accounts.  The bill will temporarily suspend the excise tax that is levied when seniors fail to the the required minimum distribution (RMD) from their retirement accounts.

This penalty is waived for 2009, which means that seniors will not be required to take withdrawals from their tax deferred retirement accounts during 2009, which will hopefully give these accounts time to recover before the 2010 required distribution.  Unfortunately, this law does not apply to 2008 when it would have made the most difference to investors who have lost significant amounts in their accounts.

If you’re not familiar with the RMD, basically taxpayers who are age 70 1/2 must take annual required minimum distributions from their tax-deferred retirement accounts, including traditional IRAs, 401Ks and 403Bs.  The amount is based on your life expectancy and the prior December 31 balance of your account.  Failure to withdraw this amount and you will be levied a 50 percent penalty on the amount that you should have withdrawn… and this is in addition to your regular income tax!

Surprisingly, there is still talk that the RMD for 2008 will be suspended.  If relief is passed for 2008, taxpayers who have already taken their distributions will be allowed to re-contribute those funds so they don’t have to pay taxes on them.  We should know by mid next week if the 2008 RMD is also suspended.

Here is a refresher on the original law (edited for 2009):

During 2009, individuals can make energy-conscious purchases that will provide tax benefits when filling out their tax returns. Manufacturers offering energy efficient items such as insulation or storm windows can assure their customers that their energy efficient items will qualify for the tax credit if certain energy efficiency requirements are met.

This tax law change provides a tax credit to improve the energy efficiency of existing homes. The law provides a 10 percent credit for buying qualified energy efficiency improvements. To qualify, a component must meet or exceed the criteria established by the 2000 International Energy Conservation Code (including supplements) and must be installed in the taxpayer’s main home in the United States.

The following items are eligible:

* Insulation systems that reduce heat loss/gain
* Exterior windows (including skylights)
* Exterior doors
* Metal roofs (meeting applicable Energy Star requirements).

In addition, the law provides a credit for costs relating to residential energy property expenses. To qualify as residential energy property, the property must meet certification requirements prescribed by the Secretary of the Treasury and must be installed in the taxpayer’s main home in the United States.

The following items are eligible:

* $50 for each advanced main air circulating fan
* $150 for each qualified natural gas, propane, or oil furnace or hot water boiler
* $300 for each item of qualified energy efficient property.

The maximum credit for all taxable years is $500 — no more than $200 of the credit can be attributable to expenses for windows.

Additionally, the new law makes a credit available to those who add qualified solar panels, solar water heating equipment, or a fuel cell power plant to their homes in the United States. In general, a qualified fuel cell power plant converts a fuel into electricity using electrochemical means, has an electricity-only generation efficiency of more than 30 percent and generates at least 0.5 kilowatts of electricity.

Taxpayers are allowed one credit equal to 30 percent of the qualified investment in a solar panel up to a maximum credit of $2,000, and another equivalent credit for investing in a solar water heating system. No part of either system can be used to heat a pool or hot tub.

Additionally, taxpayers are also allowed a 30 percent tax credit for the purchase of qualified fuel cell power plants. The credit may not exceed $500 for each .5 kilowatt of capacity.

These items must be placed in service after Dec. 31, 2008, and before Jan. 1, 2010.