With trillions of dollars of collective wealth embedded in the value of their homes, it’s no wonder people ask about how they might someday access their real estate to help support their retirement years. This question often leads to a conversation about a little understood product, the reverse mortgage.

Reverse mortgages are somewhat complex and definitely counterintuitive. As opposed to the traditional “forward” mortgage, where you borrow money and then slowly pay back the loan, a “reverse” mortgage is an entirely different beast.

With a reverse mortgage, you borrow against your home’s value with no scheduled repayment. You either start out a reverse mortgage by receiving a lump sum, getting a monthly check, opening a line of credit or choosing a combination of these options.

Unlike a typical mortgage where each monthly payment you make builds equity in your home, a reverse mortgage produces just the opposite; a drawing down of the equity you have in your home. Your net worth literally heads in reverse.

Your reverse mortgage’s growing debt load – invisible, almost, with no payment obligation – will only come due when you move out of your home and it’s eventually sold. Your move may be by choice, by necessity or by death. At least one of those triggers is under your control!

Let’s dig further into the growing and invisible nature of the loan. With each check sent to you by your reverse mortgage, your principal and interest piles up. And, with each passing month, your new borrowing plus your unpaid interest speeds up your debt accumulation. It’s all by design, of course.

HUD, the government agency, closely regulates how much equity a person can tap with a reverse mortgage. Depending on your age and various other factors, only about 50% to 75% of your home’s equity is initially available to you. The reason for the limit is crystal clear.

If your debt pile grows to exceed your home’s value, the federal government is stuck with any shortfall after your home is sold. In fact, HUD’s current shortfall with reverse mortgages recently prompted them to increase the fees they charge borrowers in order to protect the government against future losses.

To get a sense of the fees involved with reverse mortgages, imagine your home is worth $250,000, you’ve reached age 62 – the youngest age allowed – and you currently have no mortgage. If you chose to borrow your initial maximum of around $125,000, your startup loan fees would likely exceed $10,000. This helps to explain why HUD requires all would-be borrowers to complete financial counseling before getting a reverse mortgage.

Join Jason P. Tank, CFA for the Money Series’ season opening presentation on reverse mortgages to be held on Wed., September 13 at 6:30pm in the McGuire Rm. at the Traverse Area District Library. To see the Money Series’ season lineup, visit www.MoneySeries.org

We certainly live in a brave new world. Welcome to the age of passive investing where almost half of all dollars are now invested in index fund strategies with the singular goal of “tracking the market.” That is double the level seen a decade ago and quadruple the level seen only two decades ago.

And, most actively-managed mutual funds – those run by human beings making decisions – are tightly hugging as close as possible to their market-based yardstick. This practice is known as “closet indexing.” Their marketing departments basically demand this lemming-like behavior.

For all intents and purposes, this means the vast majority of money is blindly following, not leading. The question is, to where is it leading?

Let’s examine what a typical balanced portfolio made up of index funds really looks like for the average passive investor.

Within the stock segment, a conventional approach would call for you to own a big dollop of large company stocks along with smaller helpings of mid- and small-sized companies and some international stocks. Within the bond portfolio, a conventional approach would lead you to own a mixture of risk-free government-backed bonds, corporate bonds and some mortgage-backed bonds.

Using the index funds created by Vanguard – the North Star of the indexing movement – the following is precisely what you’d actually own as an investor.

You’d own truly tiny pieces in 506 large companies, 348 mid-sized companies, 1,438 smaller companies and minute slices of 6,176 international companies. On top of that, you’d also own infinitesimally small pieces of 8,174 bonds. Together, you’d own 16,642 individual stocks and bonds.

Viewed another way, for a hypothetical $500,000 balanced portfolio, your biggest stock holdings would be in Apple, Microsoft, Facebook and Amazon and these big bets would represent only about $3,000 each. In addition to these well-known success stories, you’d also have thousands of other investments with an average size of $50 each.

As absurd as this portfolio diversification sounds, it’s important to highlight the primary benefit of the passive, index fund approach. Since no single human being is expending any thought on the investments being made or the risks being taken, the cost of investing in index funds is basically zero. Think about it, you get to invest in over 16,000 securities and it costs you nearly nothing.

Let’s now examine the state of the investment markets. Our current bull market phase is now in its ninth year. Stock prices are at levels only seen at market peaks. Bond yields rest at near-historic lows. And, we live in a world that’s increasingly drawn to artificial intelligence and automation, including entrusting it to manage a person’s life savings. Hmm…

We do live in a brave new world.

As this year has unfolded, investors have been treated to a highly unusual level of financial market calm amidst an equally unusual stretch of political volatility. It’s been eerily calm, in fact.

To put this in perspective, on only two trading days this year has the stock market ended up or down over 1%. In comparison, the number of such wide swings averaged nearly 40 trading days over the past nine years.

Predictably, investors now appear to expect continued calm. One common way of measuring their expectations is through a volatility index, known as the VIX. Today, the VIX index has touched 15-year lows on seven days in the past six weeks alone.

Prior to this, the VIX has only seen readings this low on four occasions, dating all the way back to another very calm period in late 2006 to early 2007. While not predictive, that prior period preceded extreme market volatility and the onset of a both a recession and a bear market.

It almost goes without saying that this lack of volatility has been surprising given the unpredictable political backdrop, a Federal Reserve that has now raised interest rates three times since last December and a US economy that has generally been disappointing relative to the high hopes at the start the year.

Within all of this calm, the first half of 2017 still produced continued gains for investors. Broadly speaking, the US stock market produced a first half return of roughly 6% to 8%. Broken down, the S&P 500 index (big company stocks) rose about 9% and the Russell 2000 index (smaller company stocks) provided a first-half return of about 5%.

Given that most investors are balanced to some degree, it’s important to note that the bond market’s year-to-date total return was about 2%.

Viewing stocks and bonds together, balanced investors willing to simply accept the gyrations of both good markets as well as bad markets experienced returns of about 4% to 6% for the first half of 2017. It’s fair to describe the year so far as a slow-and-calm upward grind.

In the face of these surprisingly solid results for passive investors, my advice is to not let this quiet calm breed an imprudent complacency in your portfolio.

With the Fed hell-bent on raising interest rates in the face of still-low inflation and still-tepid economic growth, with near-peak employment and near-peak auto production, with an historically high-priced stock market relative to company earnings and, finally, with our politicians soon shifting into full-campaign mode with little legislative action to accelerate their big plans for growth, I believe a very discriminating portfolio strategy continues to be both prudent and justified.

If history holds any predictive power – and it only loosely does! – we may average 1% daily swings in stock prices every few trading days before 2017 comes to a close. Now, that would make for one interesting ride, I must say!

It is my belief that honesty is always the best policy. Given that, I am happy to pass along some recent news from the world of finance that helps to tilt things in your favor.

This past Friday, the long-awaited Department of Labor “fiduciary duty” rule finally sprang to life. Despite the Trump administration’s immediate executive order to delay the Obama-era rule (a move with the likely aim to later squash it entirely), the wait is over.

In a nutshell, essentially all financial advisers must now place your interests above their own.

While it may sound like a common sense requirement, you’d be surprised at how pitched the battle has been to impose a robust and uniform fiduciary duty standard across the entire investment industry.

As a result of the new rule, all advisers who choose to provide advice on retirement plans, such as 401(k) accounts and, more expansively, all IRA accounts, now legally owe their clients a duty of good faith, honesty and trustworthy conduct.

It should be noted that this fiduciary duty certainly isn’t new to all types of financial advisers. Registered investment advisers who are strictly compensated on a fee-only basis have always operated as legal fiduciaries to their clients.

However, for professionals who sell financial products on a commissioned basis, such as annuities, insurance or some mutual funds, the new code of conduct now applies. Life just got a big tougher for them and a bit easier for the public.

As a key part of this new, uniform fiduciary duty rule, financial professionals must now operate by what’s known as an “Impartial Conduct Standard.” This standard has three parts that deserve mention.

First, financial advisers must now provide advice that reflects their clients’ personal circumstances, is prudent in its implementation and consistently reflects their underlying duty of loyalty to their clients. As part of their duty of loyalty, any advice they provide must also openly disclose any professional conflicts of interest that might exist.

Next, advisers must receive no more than “reasonable compensation” for the services they provide. Despite the clearly subjective nature of the word, reasonable, in my opinion its inclusion helps to impose a healthy gut-check on overall fee levels in our industry. This is a very good development, especially in a relationship where technical knowledge is so clearly in the hands of the professional.

Finally, to fulfill their duty, financial advisers must also avoid making misleading statements to their clients. While this is obviously a base-level expectation of all clients, it spotlights honesty as the cornerstone of any client-adviser relationship. After all, acting with professional integrity is essentially what it means to have a fiduciary duty.

Unsurprisingly, it likely took many hundreds of pages of government rule-making to codify what we’ve always known; honesty is the best policy. Nevertheless, I am quite pleased it is now the law of the land for many more financial professionals. The public will be better served as a result.

Note: This post was originally published on Frontstreetfoundation.org

It is my professional opinion that today’s stock market and bond market are both generally overpriced. If I am correct, future returns for passive investors will be lower than hoped-for and the implications will be quite large.

The US is facing a substantial pile of age-related liabilities. I am not talking about the tens of trillions in federal government debt. I am also not talking about the many trillions more in mortgage, auto, student loan and credit card debts either.

Instead, I am talking about the very real funding shortfalls in government, corporate pension plans and the critically thin level of household retirement savings we see across the nation.

According to one study by the Economic Policy Institute and another by the Government Accountability Office, retirement readiness for most pre-retiree households in the US is downright alarming.

For the cohort of people age 55-64, the average retirement savings is about $100,000. However, this doesn’t paint the whole picture. To provide further perspective on a widening wealth gap, about 10% of this age group have retirement savings of at least $500,000, while nearly half have zero saved for retirement. The situation is clearly about the few haves and the many have-nots.

Further, at the corporate pension plan level, a glance at these plans’ funding status shows a shortfall totaling hundreds of billions of dollars.

In addition, layering on the officially estimated shortfalls in both state and local government pension plans, their funding deficits alone add up to yet another $1.5 trillion.

Everywhere you look, our increasingly aging population appears poised to expose what has been decades of looming financial issues.

What do these trillions of dollars have to do with the stock and bond market? Plenty.

Using the longer term measure of the stock market’s price level today relative to companies capacity to earn profits – measured by the Shiller Price-to-Earnings ratio, among multiple other reputable, value yardsticks – today’s stock market ranks in history as one of the most expensive ever.

The same can be said about most forms of bonds as well. Interest rates around the globe are hovering at rock bottom low levels. This means bond prices are likewise hovering near all-time highs.

A truism of investing is the higher price you pay today, the lower your returns will be over time. Price acts like gravity; silently pulling down future returns.

Given this, it’s nerve-racking to realize that the trillions of funding deficits across government, corporate and private households widely use the assumption of future investment returns in the range of 7% to 8% per year. Let me non-eloquently say, fat chance!

In contrast, it’s much safer to assume that passive stock market investors will earn, at best, low single digit annual returns over the next decade. Of course, with currently very low interest rates and some irrefutable math, bonds are slated to do no better.

As a result, the longer-term implications are big and our retirement system’s dependency on high returns grows ever larger. We certainly do live in interesting times!

Jason P. Tank, CFA is the owner of Front Street Wealth Management, a fee-only wealth advisory firm located in Traverse City. He encourages questions and comments about future columns. Contact him at (231) 947-3775, by email at [email protected] and at www.FrontStreet.com