All About Reverse Mortgage

While planning for the Retirement one should keep in mind that what are the options available to an investor at the age of Retirement for the regular inflows or annuity. That might be Reverse Mortgage, Insurance Plans, SWP, etc.

Let’s check what is Reverse Mortgage, options available, their advantages & disadvantages in this post.

What is a reverse mortgage?

In a home loan scheme, you take a loan from the bank, buy a house with that loan and pay back the loan along with interest to the bank.

In case of a reverse mortgage scheme, the homeowner receives money in installments equivalent to the value of the loan.

The bank will have the right to sell the property after the borrower passes away to recover the loan If the sale proceeds are in excess of the sum due to the bank, the excess is returned to the legal heirs. The borrower also has the option to repay the loan earlier as well.

A reverse mortgage allows a person to get a regular cash flow to take care of financial needs. The money can be received in a lump sum and/or regular payouts.

What are the options available for a person applying for a reverse mortgage?

There are two options available —Reverse Mortgage Loan(RML) and Reverse Mortgage Loan-enabled Annuity (RMLeA).

In the case of RML, you will either get a lump sum amount or amount in installments, depending on the frequency selected.

In the case of RMLeA, the loan amount is given to an insurance company. The insurance company works with the corpus such that it gives you an annuity for the rest of your life. This is like a pension.

Ask Yourself – Is 1 Crore Enough for Retirement?

Who can choose to go for a reverse mortgage?

Senior citizens who own a house can opt to go for a reverse mortgage. The house should have been bought by the borrower. It should not be inherited property. Senior citizens may not have a regular flow of income and reverse mortgage helps them to take care of living expenses.

How can I avail of a reverse mortgage?

The following conditions are required to be satisfied for a person to avail of a reverse mortgage –

  • The person should be a senior citizen (age>60 years).
  • The person should own a residential house.
  • If the person is taking the loan jointly with the spouse, the spouse should be above 55 years old.
  • The house can be owned individually by the person wanting the reverse mortgage or jointly with the spouse.
  • You can apply for it through a bank or a financial institution. Fill in the application form and submit a copy of PAN card and registered will, details of the property and a list of legal heirs along with the form to the bank. The bank will assess the property and decide on the loan to be given. It usually gives loan up to 40%-60% of the value of the property. The bank will charge some fees related to the processing of the loan.
  • SBI, LIC, PNB, Indian Bank, Andhra Bank, Dewan Housing Finance Limited are some of the organizations that offer a reverse mortgage.

What are the tax implications of a reverse mortgage?

There are no tax implications in case of a reverse mortgage. The amount received as a lump sum or as annuities are not liable to tax payments. If the property is sold before the reverse mortgage comes to an end, the relevant tax for capital gains is applicable.

What are the advantages and disadvantages of a reverse mortgage?

Reverse Mortgage looks like an attractive option. It is a good source of income for retirees. It uses the existing property to generate income.

The bank can recover the loan only after the death of the borrower or when the property is sold. There is no fixed tenure for repayment of a loan.

Reverse Mortgages are not popular in India. Many people have a sentimental attachment to their property and do not want to sell it off for a regular income stream. They want to pass it on to their heirs.

The loan value given by banks for reverse mortgages is low. The owner has to ensure the upkeep of the property and pay all taxes and other dues related to the property. If this is not done, there can be foreclosure of loan or to prove that he/she can make their homeowner’s insurance, tax, and upkeep payments. If failed in keeping the taxes current and paying the insurance premium on time will result in foreclosure of the loan.

The product is not easy to understand nor well publicized. People are unaware of its features and stay away from it.

Should I go for a reverse mortgage?

A Reverse Mortgage is a great option for people who want to live in their house and at the same time earn an income but are not interested in giving the house to their heirs. It is good for people who have valuable property and not enough investments or savings to generate regular income for them.

But the documentation is a tedious process. There is not enough knowledge and information about a reverse mortgage in India. If as a retiree, you have a source of income but it falls a little short of what is needed, you can go for portfolio review or go for more tax-efficient investment products. The processing fees should be looked at and checked if it is not burning a hole in your pocket. If you have a big house, you might want to sell the property when the property market is good and you can invest the money in different investment products to get the most optimum returns. It may not be necessary that the bank fetches a good price for your property after your death. You can move into a smaller house where maintenance related efforts and costs may be lower and will work to your advantage.

Consider these factors before you make the final decision on a reverse mortgage.

After retirement, one may not have a regular income channel. But expenses will continue to be there. Some expenses might increase and some might decrease.  It is important to have an appropriate strategy to get a regular income during retirement.  It is important to manage money smartly so that one does not have financial woes in the retirement years. If one invests an appropriate amount as per the financial plan in MFs when he/she has a regular income, Reverse mortgage can be set up during the retirement years for regular income.

If you have any questions regarding Reverse Mortgage – feel free to ask in the comment section.

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Hemant Beniwal September 10, 2019 0 Comments

Retirement Strategies: Using Mutual Funds

Retirement is considered the ‘golden’ period of one’s life, and it could be – if you plan right for it. You’d need a sizeable corpus to retire comfortably, while maintaining the same lifestyle, or a better one. The first step is to plan, the second is to execute that plan.

We’d covered the golden rules of retirement in one of our earlier articles. We’ll now cover how to use mutual funds to plan for your retirement and what strategies to adopt.

As discussed in our earlier article, you’ll first need to estimate how much you will need when you retire. This will involve understanding your current expenses and savings, the age you expect to retire, your expected lifespan, inflation and the growth you expect from your investments. You’ll arrive at a required corpus for your retirement. A good retirement calculator can help you figure out how what your corpus will be after adjusting for inflation and how much you need to invest to build that corpus.

Let’s look at an example:

Current age 30 years
Retirement age 60 years
Expected lifespan 80 years
Amount you want to have for retirement 1 crore
Expected rate of inflation per annum 7%
Amount needed at retirement adjusted for inflation ~7.7 crores
Expected rate of return on your investment 12%*
SIP (monthly) ~25,000

*assumed rate of return for equity mutual funds

The above calculations don’t consider any existing savings you may have but taking them into account will give you a better picture of how much you’ll need to invest. Also, do account for any other planned expenditures and emergencies while figuring out how much you would need when you retire. You can calculate your retirement needs here.

Once you figure out how much you need to invest, the next step is to set up your SIP.

Start a SIP

What investment strategy should you follow?

Your investment strategy depends on two factors – your age, and your ability to take risk, both interlinked. You’ll also have two needs – capital appreciation, and regular income.

You can start a SIP in equity funds for capital appreciation. The further away you are from retirement, your ability to invest in equity is higher. Periodically step-up your SIP to possibly reach your goal faster. You can also add lumpsum investments along the way to your corpus.

The closer you get to retirement, use Systematic Transfer Plans (STPs) to move into debt funds, and Systematic Withdrawal Plans (SWPs) for monthly withdrawals.

STPs can be used for moving investments from debt to equity and from equity to debt. In the case of retirement, or any goal, the closer you get to your goal, the lesser you’ll want your investments to be impacted by market volatility. Using an STP will move your money from equity to debt and give your portfolio the stability you need.

SWPs allow you to withdraw a fixed sum at regular intervals from your fund. This will give you a regular stream of income during retirement.

It would be prudent to transfer a lumpsum from your equity fund to debt using an STP, and to do an SWP from the debt fund to your bank account. Ensure you continue to have investments in equity, albeit a lower allocation, so there’s still room for capital appreciation, and you benefit from the best of both.

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Shweta Nichani July 24, 2019 0 Comments

Let’s get serious about Retirement Planning

How do millennials view savings or investments? This is a reasonably common topic of discussion in today’s world of financial planning.

If there’s one activity that we all tend to postpone and defer, it’s retirement planning. Most of us tend to underestimate the perils of poor retirement planning or the lack of a meaningful corpus at the time of retirement.

30s to 40s is typically when an individual has achieved a certain level of stability in both their personal and professional life. There is a sense of rationality, balance, and maturity that an individual typically attains. The key step in financial planning is estimating post-retirement expenses. One mistake that most people make in projecting cash-flow requirements post retirement is visualising a downsizing in lifestyle and consumption needs in post-retirement life. Consequently, they project lower ‘real cash’ flow needs. This to me is the biggest mistake most people tend to make.

The golden rules of estimating post-retirement expenses

  1. Factor in inflation – that’s what ‘real money’ means – and factor in real inflation. Let your retirement calculations assume inflation at nothing less than 7% CAGR. It is always better to be on the higher side. If the inflation isn’t as high as you projected, you will have more funds in hand. However, if your projections are substantially lower, you will be in dire straits. Here’s a real scenario: To generate Rs.6,250 on a monthly basis, you would have needed a corpus of Rs.12,50,000 30 years ago. Today, you would need a corpus of Rs.1 crore to generate a monthly income of Rs.50,000. That’s the impact of inflation. (Inflation rate – 7.19% for 30 years computed based on Cost of Inflation Index, source: www.incometaxindia.gov.in; Monthly interest assumed at 6% p.a)
  1. Assume no clamp down in lifestyle and consumption needs. Human beings are inherently averse to accepting change. This is more so the case when it is a scale down instead of a scale up. Moreover, there will always be additional lifestyle expenses that come with age than you may think of as necessary now.
  1. Prioritise your expenses into three categories – must have, nice to have, and can do without. Try to live without the ‘can do without’ before you retire. This will help you address the previous point as well as give you a more realistic picture of what your expenses are like currently and what they could be like in the foreseeable future.
  1. Project your expenses into monthly payouts and annual payouts. Annual payouts include things like Car Insurance, Medical Insurance, home-care initiatives like pest control and AC annual maintenance. Factor in all the expenses you undertake on an annual basis.
  1. Build capex spends. For instance, you will need to replace your car once in 5 years, will need a TV once in 8 years, a mobile once in 3 years, and so on. These can be a major drain post retirement.
  1. Once you arrive at these factors, sum these up and back-calculate when you intend to retire. Project a realistic life span for yourself of at least 80 years at the minimum. Now use these numbers to calculate your corpus.
  1. Break this corpus into yearly and monthly expenses.
  1. The above computation assumes that you have adequate Medical Insurance. Medical expenses are a major expense, especially post retirement, and you need to have a comprehensive medical policy that covers you and your spouse in case of eventualities. This is extremely important as an ineffective policy or lack of a medical insurance can throw all your plans out of kilter since the need for medical intervention and scope of medical expense is very difficult to predict.

Where do I invest for retirement?

There are many options available in the market including dedicated Pension Schemes. But for now, I’d like to emphasise that every retirement investment portfolio must have a significant allocation to equity.

Equity is the best asset class to beat inflation in the long run. Equity mutual funds in India have generated close to 15% – 17% CAGR over the past 10 years. That’s about 8% to 9% above inflation. When you compound this annually, it gives you a significant amount of wealth over an extended period of time. Here’s a fact – Over the past 40 years, an investment of Rs 10,000 in the S&P BSE Sensex would have grown to over Rs 45,28,568 (data as of March 31, 2019)

The typical approach is, the longer the period for retirement, the greater the allocation to equity. Individuals who are less than 40 years of age should have about 80% of their investments in equity and the assumption is at least 40% of their income goes towards investment products. My observation is that anything less than these numbers will always lead towards a sub-optimal post-retirement corpus.

To summarise,

  1. Start early. Ideally, start from your very first year of work. The same old parents-to-children golden rule works in this situation as well – do not postpone important activities. Retirement planning is a supremely important activity and something that young India will do well to register on their priority list.

Project a realistic retirement age. Just because our fathers and grandfathers retired at 60 years does not guarantee that we will retire at 60 too. Be realistic about your retirement age

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Ajit Narasimhan July 24, 2019 0 Comments
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