Skill Level Appropriate for all
- The post-war growth of much of the developed world was very good for Baby Boomers. They were able to buy houses for $20,000 that are now worth $800,000. They had low cost education and, for the most part, low cost healthcare. They spent their money, living lives unimaginable to their war era parents. And they spent, cars, vacation, college costs for their Gen X kids, and their employers offered pensions. All was gonna be fine, right? Not so much. The golden era of live today and worry about tomorrow sometime later is long gone for Baby Boomers and now for everyone.
In Australia where I grew up, one in every three houses is owned by someone over the age of 70. Most people this age don't work. They may or may not have pensions, but the reality is for many homeowners, regardless of age, is that they're asset rich, cash poor. So what to do if you, or someone you love, is asset rich and cash poor? The first thing to consider is that money is emotional. People have significant emotional investment in their assets that shouldn't be discounted.
So the idea of just sell it isn't generally the best first option. The second thing to do is math and simple math. How much does this asset cost to keep? A piece of art or a stock, for example, the answer is next to nothing. For a house it's significant, taxes, maintenance, furnishing, heating and cooling, just to name a few. Next, what is the sale value of the asset at this point in time and what options in life could be afforded by selling the asset? But again, humans are emotional and sometimes the value today doesn't matter.
The owner won't sell. So then what? Well, the good news is that a hard asset can be borrowed against. A home equity loan could provide the capital someone needs to live on and pay the bills. They generally have reasonable interest rates with clear repayment terms. But if the home owner no longer has cash flow from a job, for example, a home equity loan isn't gonna work because they have nothing to pay it back with. One option that's increasing in popularity is the reverse mortgage. In a traditional mortgage you paid a bank over the course of the last 30 years and finally you own your home outright.
A reverse mortgage is basically the bank buying it back from you. Every month they'll send a check and take more equity in your home, and your percentage of ownership decreases. But consider the big downside risk. If you live too long, the bank can kick you out of your house. Another similar option is to borrow against your retirement account or life insurance policy. Both loans can provide much needed cash flow to the asset rich and cash poor. But the bottom line is this, kicking a problem down the road only makes it bigger.
Once an asset is gone, its potential for growth has gone with it, and the logical next step is debt. With an aging population, these types of ways to get money out of assets will only increase. The best thing to do is also the hardest. Take emotion and sentimentality out of the equation. Ask yourself what can be done to ensure that problems are not being kicked down the road or onto the next generation, because as hard as change may be, it's way worse to delay or avoid problems.