Going For Broke? Seniors Turn to Newer Loans To Avoid Cash Crunch
Last updated: Jun 06, 2008
As the economy continues to falter, senior citizens are turning to more aggressive -- and in some cases riskier -- ways to generate cash to pay bills and buy groceries and gas, according to a front page story in the Wall Street Journal (online subscription required.)
In record numbers, seniors are raising money by turning to products like:
- Reverse mortgages
- REX loans, which pay out lump settlements in exchange for a chunk of future equity gains
- Life insurance settlements
- 401k loans and hardship withdrawls
Though these loans and products may seem like a convenient way for income-strapped seniors to get quick money, some carry tax consequences and higher fees than traditional loans and home equity financing. The article blames the trend on the usual culprits: falling home prices, dwindling jobs, and a sharp increase in food and energy prices.
Seniors who buy into these types of products won't necessarily lose their money or assets, but there is the risk of jeopardizing future investment returns (say, by cashing out a 401k early) or reducing the size of an estate that your parent may want to leave to future generations (like with a life insurance settlement.)
If your parent is considering any type of loan or other product that offers up-front cash in return for high-fee or high-interest payments down the line, it's important that they talk over all their options with a financial advisor experienced in elder finance issues. Other resources to help you help your parents make smart financial decisions include:
- Dollars and Sense - Is a Reverse Mortgage Right for You?
- 7 Things to Look for When Choosing a Financial Planner for Your Parents
- 8 Questions to Ask Your Lender Before Getting a Reverse Mortgage
Seniors who opt for one of these "riskier" options may wipe out whatever financial safety net they've worked to create over long years of saving and planning. On the other hand, in the words of one man in the story who emptied his retirement accounts at the age of 51: "Why plan for retirement if you can't make it today?"
Image by Flickr user Kevin Dooley, used under the Creative Commons License.
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