Problems Getting a Mortgage if you are Asset Rich, but Have Little “Income”

So, you’ve worked hard all your life, saved and invested smartly and now you’d like to retire and enjoy yourself. That’s all well and good, but you might have a problem getting a simple mortgage.

Let’s say that you live up north, have your house paid off and would like to sell it and move to your dream house in Florida or Arizona. Maybe you have decided to delay your Social Security until you are 70 and earn 8% a year while you wait. So in effect, you have little or no income other than maybe a small pension or two and dividend and interest. Your financial advisor suggests you invest the proceeds of your house up north and take out a mortgage on your new Florida home. Since mortgage interest rates are around 4% and are tax deductible this might make good sense.  When you apply for your loan the new mortgage rules call for 43% debt to income ratio, but you no longer have “income”. Under the new rules the banks want to see a demonstrated process where you are already turning investments into income. Your substantial base might not qualify, as such, for even a smaller $100,000 – $250,000 mortgage.

Here is what you can do well before you try and apply for a new mortgage:

  1. Reduce your debt, you are retired and no longer have a paycheck. Once you get a budget in place you can go back to enjoying your new retirement life.
  2. Make sure there no other obstacles to getting a mortgage, for example your Credit Score. It is helpful to have an 800+ credit score.
  3. If you are going to hold your new house in a revocable trust along with your other assets, set it all up ahead of time. You’ll still need to meet the income retirements.
  4. Even though you want to delay Social Security until you are 70, start it at least 3-4 months before applying for your loan, you now have income. You can later (within 1 year) stop Social Security and send them all the money back, with no penalty.
  5. Modify your investments in your taxable account so that you are generating a good bit of monthly and quarterly dividend income. Check the ex-dividend and payment dates so that you can prove income.
  6. Set up a systematic, monthly withdraw from your brokerage account into your household checking account and make sure you have 3-4 months of proof these transactions took place.

With the above steps in place you should now have “income” to meet the debt/income ratio. You’ll feel pretty secure that once the closing on the new house has taken place and the boxes are unpacked you can reverse some of the steps shown.

Enjoy your retirement.


Retirement Planning Part 4 – What Should I Invest in While in Retirement

In Part 3 we discussed how to determine how much money you’ll need or have in retirement. In this post we’ll discuss what type of investments you should have in your portfolios.

Let’s start with the premise that your retirement plan calls for you to withdraw 4% a year from your investments to cover your expenses. This is a common benchmark used by many planning tools. A common recommendation is that you maintain an allocation of stocks vs. bonds that match your age, for example if you are 65 years old you would have 65% invested in bonds and 35% in stocks. We’ll look at your investment options.

What should I invest in?

  1.  First of all these general recommendations were pretty good when we had a “normal” market environment. 65% in bonds or any fixed income was not a problem since the US 10 year Bond yields from 1996 to 2006 ranged from 5% – 16%. If you wanted to withdraw 4% and were making 5%+ you were in pretty good shape. Today 10 year Bonds yield under 3%, with Bond prices surely headed down. Therefore you are stuck with a rapidly depreciating asset. Furthermore, you are withdrawing more than you are earning. Bonds today are safe, but not the best investment.
  2. Stocks, by comparison have had a pretty good run since the 2009 market lows. For the smart people (brave) people who hung on to their solid stock investments through the recession, they are now back to all-time highs. The poor people who were panic struck and sold at the bottom of the market and stayed in cash for a year or so, they are financially stuck.
  3. Given the current market conditions investors should look to overweight stocks, especially those with solid dividends. Many of these stocks have “bond-type” yields and have the possibility of both increased yields and growth in value. I’ll cover some of these possibilities in a separate posting, including stock preferred shares, MLP’s, BCD’s and REITS. For your general investment pick household names that have a solid track record of dividend growth such as:
    1. Verizon 4.37%
    2. Altria 4.23%
    3. American Electric Power 3.49%
    4. Proctor & Gamble 2.80%
    5. Microsoft 2.57%
  4. All of these recommendations need to be adjusted on an annual basis, just like rebalancing your portfolio. Some of these investments might be “buy and hold” but not “buy and forget” as I explained in a prior article. Some people think this is like day-trading, a risky practice if you’re not properly trained, but it isn’t. There are a few individual stocks you can keep forever, but many need to be swapped out. One good practice is to set goals when you buy a stocks, you need a purchase price and a sale price, before you buy. Don’t buy at the top and sell at the bottom.
  5. Many people may not feel like picking individual stocks, they are better off buying Exchange Traded Funds (ETF’s). ETF’s are usually better than Mutual Funds because they are more transparent and easier to understand. ETF’s trade like stocks, Mutual Funds trade based on a NAV, Net Asset Value, this is calculated at the end of each day.
  6. So what about bonds? It’s OK to have a small bond position today, just make sure they are of “short duration” and keep an eye on the core price. High quality corporate bonds are OK. As prices drop over the next 6 months get out and sit in cash or high dividend stocks until bond yields climb above 4 or 5% then start buying on a “ladder” basis.

In summary, you can’t withdraw 4% on an investment only yielding 2-3%, you’ll run out of money sooner than later. In the current market high quality, high dividend stock or stock ETF’s  are a safe bet.

In our next post we’ll discuss how some specific investments will help you grow your portfolio to meet your retirement needs.

Retirement Planning Part 3 – How Much Income will I Need/or Have in Retirement

In Part 2 we discussed some actionable items that can help you prepare for your retirement. In this post we’ll discuss how to determine how much money you’ll need or have in retirement.

Now that you are planning to retire and you understand there are no more “paychecks”, you need to determine how either how much money you’ll need in retirement. Of course we’ll also examine how much money you will actually have access to based upon your current savings, investments, pensions and Social Security.

How much will I need?

  1. First of all the common recommendation is that you will need about 80% of your pre-retirement income in order to retire without a major life style change. Therefore if you (your household) were making $100,000/yr. you should be able to live on $80,000/yr. in retirement. However, this may not meet your needs, for example if you currently make $100,000/yr. but carry significant debt or have other financial responsibilities you may need a lot more than 80%.
  2. The very best way to determine how much you’ll need is to develop a start from scratch, realistic expense budget. Be sure to include the cost of future healthcare insurance costs of buying cars, replacing appliances, vacations, etc. Also set aside a healthy emergency fund.
  3. You can now search on line for retirement planning calculators to help you determine how much money you’ll need to actually retire. I found that T. Rowe Price recommended 11x your retirement income, Fidelity 12x, and so forth. All of these have varying assumptions. Here is another examples:

BTN Research estimates that, assuming 5% average annual investment returns, for every $1,000 of monthly income you want over a 30-year retirement, you need $269,000 in the bank. Let’s consider that same household making $75,000 a year. To replace the commonly recommended 80% of income in retirement — or $60,000 in this case — the household would need $5,000 a month. In this calculation, this household’s number is $1.35 million, or 18 times final pay. A higher investment return would bring the numbers down.

 Dallas Salisbury, president of the Employee Benefit Research Institute offers: You need 33 times what you expect to spend in your first year of retirement—after subtracting Social Security benefits. Let’s take that same household, which spends every penny of its $60,000 income in retirement. Say this household collects $20,000 a year in Social Security. That leaves it spending $40,000 from other sources. So this household still needs a nest egg of $1.32 million, or just shy of 18 times final pay

 In summary, you need to use on-line tools to start building retirement plans that cover both your expenses and available income.

In our next post we’ll discuss how some investments will help you grow your portfolio to meet your retirement needs.

Retirement Planning Part 2 – Pre- Retirement Planning

In Part 1 we discussed some of the financial challenges many people face as they prepare to retire. In this post we’ll discuss some actionable items that can help you prepare for your retirement

One of the biggest shocks in your life will be the 1st day you retire and realize that you will no longer get a pay check next week. There will be no more “pay checks”. If you have a good plan in place you’ll be celebrating instead of fretting.

Here are some things you can do when you are within a few years or so of retiring.


  1. Accelerate your investments. We assume that as you are getting closer to retirement you’ll be in your peak earning years, and hopefully not peak spending years. Now is the time to max out all possible avenues of investments. Take full advantage of both employer 401K contributions and the maximum contributions you can make including all “catch-up” amounts. If you qualify contribute a maximum to your IRA or even better a Roth IRA. If you have the option of a healthcare HSA account, take it and fund it to the max. Unless you are a great stock-picker put this money into low fee S&P Index Funds or ETF for now.
  2. Substantially reduce then eliminate debt. Many people can’t afford to retire not because of their core daily survival expenses but their payment on debt. Parents might still owe on college education for their children. Some carry massive credit card debt, car loans, home equity loans, etc. You just can’t afford to retire with this debt overhang. Why, because the interest expense say 8 – 20% far exceeds any investment growth one can count on. What to do: develop a plan to completely eliminate all debt ASAP. Stop spending on all non-critical items until all debt is paid off.
  3. House mortgage payments need some discussion. The best situation is to retire with no house payments. Typically mortgage payments are your largest monthly expense. If you are carrying a large mortgage seriously consider downsizing to reduce or eliminate your mortgage. Consider moving to a much lesser cost of living location that will allow you to get much more value and maybe a meet your retirement dreams. For example, we moved from Philadelphia area to Tampa which eliminated our local and state income tax, substantially reduced our property tax and meet our retirement dreams.
  4. Build substantial cash reserves. Once debt is gone you’ll need to build cash, completely separate from your accelerated investments. You should have one full year of expenses in cash at the time you retire. You need an emergency fund and really don’t want to start withdrawals from your investments immediately upon retirement.
  5. Start building a retirement budget that considers you no longer have a “pay check”. The old adage is that you’ll need 80% of your former annual income to live on in retirement. However you may not have this money available to you for the next 30 years.

In summary, in the years leading up to retirement it is time to eliminate debt, accelerate investments and build cash.

In our next post we’ll discuss how much you’ll need in investments, pensions and Social Security to retire.

you’ll need in investments, pensions and Social Security to retire.

Retirement Planning Part 1 – A Disaster

The average American does not have an adequate retirement plan. Why, because he/she isn’t ready to retire yet. The problem is that by the time you begin thinking about a retirement plan it may be too late to effectively craft one. Most people in their 50’s are enjoying their lives and are in their highest earning years. Yet their retirement plan is basically to keep contributing to their 401K plans at work, save some money and continue to spend based on their increased income. So, what’s the problem? Times have changed and many people are facing a disaster when it comes time to retire.

Here is what is different:

  1. Here is what is different:
    1. The days of pension plans are almost gone; they have been replaced by Defined Contribution Plans, like your 401K at work. There is a big difference. A pension plan was an annuity, your company paid the entire principle and you were guaranteed a set income for life. Your 401K plan probably won’t last you a lifetime and the underlying investments are not guaranteed. Ask the people who retired in 2007-2008 and had to dip into their investments when the market hit bottom.
    2. Your 401K plan has contribution limits and is, in many cases loaded with internal fees and costs. Typically they are not self-directed and offer limited choices for investments. Many of the investment choices have little or no visibility in what the core equities or bonds are. Financial institutions that manage these make their money on both fees and “turns”.
    3. Many people have IRA’s and taxable brokerage accounts where they invest their savings. They choose mutual funds, stocks, bonds and ETF’s they think will appreciate over time and match or beat the overall market. However, they have no idea when to buy, when to sell and how to pick the right investments to match their goals. The majority of investors don’t re-balance their holdings, don’t under tax efficiencies and actually buy high and sell low. A real disaster.
    4. Savings are great, but most really safe retirement type investments are yielding a fraction of what they traditionally yielded. In past years you could just put your money into secure bonds and collect your 6-8%, these are now yielding 2-3%. Your savings account, less than 1%. How could you possibly withdrawal 4% a year in retirement if you are only making 2-3%, paying tax on it and having it be subject to inflation.
    5. You are going to live a whole lot longer than prior generations, and may very well out-live your money. Our excellent healthcare system is going to make sure you are both healthier and poorer.
    6. Owning a home is no longer a piggy bank or a guaranteed investment. Safe shelter may be a requirement but may not guarantee you the kind of appreciation it did in the past.
    7. People today just find it hard to save, or easy to spend. Take your pick.
    8. Many people believe they can live on 80% of their pre-retirement income levels, they probably can. However, they don’t know how much they will need to fund the 80% for the next 30-40 years. If you are an average 50 year old male today you have a 25% chance of living past 92 years. Many of us have relatives that are already that old.

There are ways to plan for your retirement that are simple to follow and will at least help you plot a course. It’s your job to plan for the security of your retirement. In upcoming posts I’ll give you some helpful suggestions on how to do this.

Investment of a Lifetime – Guaranteed 8% yield, Tax Free, Backed by US Gov’t

Many of us are looking for great investments, opportunities where we can make money while minimizing risks. In an environment where US Treasury’s are yielding 1-3% and CD’s about 1% where can you get a risk-free, tax-free 8% yield along with an annual cost of living increase that is guaranteed by the US Gov’t?

It’s real simple, just delay getting Social Security from age 66 to age 70. That’s right, here is how it works. If you haven’t set up an on-line Social Security (and Medicare) account yet and over 62 years old you should do so immediately. You’ll have to at least have your account set up 3 months before reaching 65 to sign up for Medicare, even if you are employed and don’t need benefits.

If you were born between 1943 and 1954 your Full Retirement age is 66. If you start Social Security at age 62 you’ll get 76% of your monthly benefit, if you start at age 65 you’ll get 93% of your benefit. However, if you start at age 66 you’ll get 100% of your benefit.

So how do you get the 8% yield, tax free, simple, just delay Social Security payments until you are age 70. You will get an additional 8% a year for those 4 years on top of your normal monthly benefit. Another benefit is that if you wait till age 70, in general survivor benefits will also be based upon this higher amount. Spousal Benefits however will be capped at your Full Retirement age 65 amount.

If you just started getting Social Security within the last year you can stop payments, pay back the amount you’ve been paid and then wait until you are age 70.

Where else can you get this kind of guaranteed return?