Retirement Planning And Your Finances

Retirement Planning And Your Finances

Retirement Planning and Your Finances
Credit Cards: Having a​ credit card is​ often a​ necessity for most senior citizens – from paying for medicine and emergencies to​ booking a​ vacation .​
But for seniors living on a​ fixed income, there are concerns about carrying a​ large balance from month to​ month and running up significant interest charges .​
In the worst cases, the debt becomes unmanageable and a​ major source of​ stress for the account holder and the family.
Another problem for seniors is​ having too many credit cards .​
That's because the more cards you have, the more opportunities you have to​ get into debt .​
And that possibility could make it​ tougher for you to​ get the best deal the next time you apply for a​ loan, insurance, a​ mortgage or​ an​ apartment .​
Having a​ lot of​ cards also can make it​ harder to​ keep track of​ when your monthly payments are due or​ to​ even realize that a​ thief may have stolen one of​ your cards.
Home Equity Loans and Lines of​ Credit: These are loans that use the equity in​ your house as​ collateral and often are tax deductible (check with your tax advisor) .​
The equity refers to​ the difference between what you owe on a​ house and its current market value.
A home equity loan is​ a​ one-time loan for a​ lump sum, typically at​ a​ fixed interest rate .​
a​ home equity line of​ credit works like a​ credit card in​ that you can borrow as​ much as​ you want up to​ a​ pre-set credit limit .​
The interest rate for a​ line of​ credit usually is​ variable, meaning it​ could increase or​ decrease in​ the future.
For elderly people on a​ fixed income who have paid their mortgage in​ full or​ whose mortgage is​ almost paid in​ full, home equity loans are tempting to​ use to​ pay for expenses, but they can also be dangerous, warned Janet Kincaid, FDIC Senior Consumer Affairs Officer .​
In the worst-case scenario, if​ you are unable to​ make the required loan payments, you could lose your home.
In general, the best uses for home equity-type loans are to​ purchase goods or​ services with long-term benefits, such as​ home improvements that add to​ the value of​ your property .​
The riskiest uses of​ home equity loans include a​ vacation or​ a​ car because you could end up paying a​ lot in​ interest charges for a​ purchase that's only of​ short-term value or​ has gone down in​ value .​
Also beware that some unscrupulous people or​ companies (including home repair contractors) push high-cost, high-risk home equity loans to​ elderly people and other consumers.
Reverse Mortgages: These are home equity loans available to​ homeowners age 62 or​ older .​
In general, a​ reverse mortgage is​ a​ loan that provides money that can be used for any purpose, and the principal and interest payments typically become due when you move, sell your house or​ die .​
a​ reverse mortgage also differs from other home loans in​ that you don't need an​ income to​ qualify and you don't have to​ make monthly repayments.
While reverse mortgages can be a​ valuable source of​ funds, they also have serious potential drawbacks .​
In particular, you will be reducing your equity, perhaps substantially, after you add in​ the interest costs.
Reverse mortgages can help in​ some situations, such as​ when you have large medical bills that are not covered, to​ make major home repairs or​ to​ help people on low fixed-incomes make ends meet, said Cynthia Angell, a​ Senior Financial Economist at​ the FDIC .​
However, you are reducing your ownership share of​ the home .​
That means the inheritance you are leaving to​ your heirs could be greatly diminished or​ you could have far less money available for other purposes, such as​ buying into a​ retirement community later on .​
That's why a​ reverse mortgage should usually be used as​ a​ last resort, not as​ an​ integral part of​ a​ retirement strategy.
Also, Angell said, the fees can be high, and that could make a​ reverse mortgage a​ poor choice to​ cover relatively small expenses.
Life Insurance: People mostly think about life insurance as​ a​ source of​ income when someone dies, but they forget that many insurance policies also can be a​ source of​ cash at​ other times.
If you have a​ life insurance policy with built-up cash value, you can borrow against that money and either repay the loan with interest or​ reduce the death benefit accordingly .​
Example: If you have a​ $100,000 life insurance policy but you owe $20,000 on a​ loan from that policy, your heirs would receive $80,000 as​ the insurance payout.
There are other options reserved for people who have been diagnosed with a​ terminal illness and have run out of​ other ways to​ pay their expenses .​
One example is​ a​ life insurance policy that can pay accelerated death benefits to​ an​ eligible policy holder — generally up to​ about 50 percent of​ the face value of​ the policy — in​ either a​ lump-sum payment or​ monthly payments that are deducted from the policy's face value .​
When the policy holder dies, the rest of​ the death benefit is​ paid out.
Another possibility is​ to​ sell your life insurance policy to​ obtain a​ lump-sum of​ about 40 to​ 80 percent of​ the face value in​ exchange for the right to​ receive the full insurance payout when you die .​
This is​ known in​ the insurance business as​ a​ viatical settlement.
These and other options for tapping life insurance policies can be complicated (including tax and other implications), and they are not right for everyone .​
Consider getting guidance from your state government's insurance regulator.

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