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 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.

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?

2014 Year End Tax Planning for Retirees

If you are like me, you are either retired or close to it. One quick shock on the day you retire is that you no longer have that pay check you’ve been getting most of your adult life. If you’ve done a good job of planned your retirement in advanced you can be celebrating instead of worrying. While in retirement you can set new goals, one of might be to pay the smallest amount of federal income tax as possible. Is it possible to appear “poor on paper” yet live a comfortable lifestyle? Yes!

Here are some items for your consideration.

  1. Manage your 2014 tax bracket. For example, if you just started receiving Social Security this year, consider returning it and delaying payments till you are 70 ½. There is no penalty for doing this. Some of this will be taxable. This might give you a chance to live off savings (cash) while paying little if any tax.
  2. Contribute the maximum amount you can to an HSA account, this will provide a credit to your Taxable Income.
  3. If possible, maximize your deductible items such as medical expenses by getting those new eye glasses, dental cleaning and so forth this year instead of early next year. Consider prepaying your property taxes.
  4. One big issue can be stock market opportunities in your taxable account. With the recent volatility in the market consider selling stocks, ETF’s or fund’s with short-term losses. These losses can then offset gains. You can also carry forward a maximum of $3,000 into future years. Just make sure you watch out for a “Wash Sale” on stocks sold for a loss if you put this money back to work in the market. When you use a loss to offset a gain you also get the benefit of re-setting your “cost basis” for the stock. This will benefit you if you buy back and then sell this stock for a gain in the future.
  5. Also regarding your taxable brokerage account, try and maintain “qualified-dividend” stocks which get preferred tax treatment or no tax at all if you can find a way to stay in the 15% tax bracket. Keep in mind that if you are in the 10% or 15% tax bracket there is 0% tax on “qualified dividends” and Long Term Capital Gains.
  6. If you’ve done a good job being “poor on paper”, you can also convert some of your IRA into a Roth IRA. Just keep an eye of your plan so that you don’t jump into a higher tax bracket.
  7. If you hold Equity Mutual Funds watch for the December “Distribution Date”, consider selling before that date if a large capital gain is expected. Otherwise you will be surprised by paying tax on a distribution you don’t actually get (the fund price, in theory is lowered by the distribution amount).

In a future post I’ll provide a plan for postponing your Social Security and various options.