If the use of mortgage leverage was a beautiful apple on the end of a branch, how far on that limb would financial advisors recommend that boomer clients stretch?
Financial planners contacted by National Underwriter warn against reaching too far. However, they add that it also depends on factors such as the boomer's financial position and disposition for risk and whether the property is a client's home or investment property.
Most people want to live in a debt-free residence at some point in their lives, according to D. Scott Neal, a certified financial planner who is president of D. Scott Neal Inc., Lexington, Ky.
How much debt is right for a client is a personal, qualitative decision rather than a quantitative decision based on whether the after-tax return on investments is greater than the after-tax cost of funds obtained using leverage, he continues.
The decision also depends on whether the boomer's property is a residence or an investment property, Neal adds.
"Prudent" leverage, according to Neal, is generally no more than 20% of income which is allocated to debt service. "Once you get much above that, clients feel that they are being pinched by debt service."
Neal says that age does not necessarily have to be a factor since "we are living longer and working longer."
But, it does depend on how sure a client is of continued cash flow, he adds. If you have a job that could be at risk or if your income is variable, then a client needs to be more conservative, he says.
But, for conservative clients, even lucrative, secure financial positions might not sway their decision to limit leverage.
Neal recounts a couple in the medical profession who insisted on removing $200,000 from their investment portfolio to pay off their mortgage even though they were foregoing a 3% spread on their investments by doing so.
Dave Moran, a certified financial planner and senior vice president with Evensky & Katz, Coral Gables, Fla., says that the question is coming up more often. However, he explains, there is a difference between older boomers who he says are "hard wired" to avoid too much debt and younger boomers who are more willing to take it on. Older boomers are more likely to believe that "if you can't pay cash then you probably shouldn't buy it," Moran says. "They (older boomers) will look at it but probably not act. Younger boomers will look at it and act quickly."
But, he says that with interest rates so low, he is even fielding inquiries from older clients who are asking "Why not use other people's money?" For instance, he says that one 73-year-old client is inquiring about an interest-only loan that he is considering for a third home. The client is a well-off risk taker who is receiving regular income distributions, he adds.
Moran says he and his client discussed the fact that interest rates are going up and his life expectancy is going down. "If the two meet at the wrong point, it could be devastating to his financial plan," Moran says he explained to the man.
Moran says he believes that "there comes a time in life where borrowing to get what you wants has little advantage–especially the older one gets." And, it depends on whether there is active or passive income, he continues. If a client's income is passive, then he recommends that debt not exceed 30%.
J. Patrick Collins Jr., a certified financial planner and president of J.P. Collins & Associates, Towson, Md., says the question of mortgage leverage comes up quite a bit with his boomer client base which has an average age of 48.
