HOW I SOLVED IT
The Mortgage Recast
To help solve this puzzle , Cheng looked into the couple ’ s housing situation , including their mortgage , as well as their Social Security and retirement plan benefits .
One of the things she did was contact the mortgage company on the couple ’ s behalf to ask about a “ recast ,” which would allow them to keep the same loan
with the same low interest rate . The recast was done in place of a refinancing , which would have changed the terms of the mortgage .
“ The recast helped reduce that deficit significantly ,” Cheng says .
With a recast , the bank would take the $ 200,000 payment from the 403 ( b ) and use it to pay the principal of the mortgage , instead of putting it toward both principal and interest payments . A recast is different from a refinancing in that the holder keeps the same loan but with a large part of the principal paid off .
There is also no origination fee or settlement for a recast , only a $ 250 administration fee . The couple ’ s remaining mortgage was $ 258,000 after the paydown . ( The house is valued at $ 1.16 million .) As their cash flow improved , the
Marguerita contacted the mortgage company on the couple ’ s behalf to ask about a “ recast ,” which would allow them to keep the same loan with the same low interest rate . The recast was done in place of a refinancing , which would have changed the terms of the mortgage .
clients could always pay higher amounts , but they had the benefit of the same low fixed interest rate and a lower payment .
Doing this enabled the couple to improve their cash flow by reducing the remainder of their mortgage payments from $ 2,750 per month to $ 1,376 per month ( a savings of $ 1,374 ).
“ Being able to reduce their expenses so that they could pay all of their expenses each month was a great relief to them ,” Cheng says .
Social Security Switcheroo
The husband had previously been receiving $ 19,000 per year from Social Security by taking 50 % of his wife ’ s benefit . But then he turned 70 in October 2022 . At that age , he could switch to Social Security benefits on his own earning record , and those amounts would be taken at an increased amount because he had delayed taking them after his full retirement .
“ When the husband turned 70 , their cash flow improved significantly with his Social Security benefits ,” Cheng says . Cheng helped the husband apply for the Social Security benefits with delayed retirement credits , which he began in October when he turned 70 , at the point his monthly benefit for life reached the highest dollar value : about $ 48,000 annually .
( It should be noted that not all these benefits will be available in the future . Social Security regulations have phased in changes over the last few years for the types of applications that can be filed . One change affected the filing of a restricted application in which the beneficiary is eligible for more than one type of benefit but wants to take only one . The one taken is typically the highest benefit and enables the recipient to delay other benefits that may be higher in the future . Another change applies to the strategy of filing and suspending benefits , which also allows benefits to increase for a future date . The changes that were enacted altered who could apply for both of these types of benefits , based on birth dates , length of marriage and other factors .)
In addition to the wife ’ s 403 ( b ), the husband had a Thrift Savings Plan — the 401 ( k ) for federal employees — of about $ 200,000 and a deferred annuity of $ 141,000 . He will also receive a Federal Employees Retirement System ( FERS ) pension in retirement . The wife was required to take $ 40,000 for a minimum distribution from her 403 ( b ) and she also receives $ 42,000 a year in Social Security benefits .
“ I also knew that I just need to help them get through this difficult time , as in October 2022 I know the husband would reach age 70 and cash flow would improve ,” Cheng says .
The pandemic was difficult for many clients . Cheng says she advised this couple , as well as her other clients , that if they didn ’ t need some funds they had available they should deposit the money in a savings account .
“ It ’ s true that I would not tell clients to liquidate stocks , stock mutual funds or stock ETFs in the short term , but being able to have some funds available in cash can give clients tremendous peace of mind ,” she says .
“ For this couple , financial planning and financial advice made all the difference .”
34 | FINANCIAL ADVISOR MAGAZINE | JUNE 2023 WWW . FA-MAG . COM