Last week at a talk I gave I was approached by a couple who wanted to know my thoughts on reverse mortgages. They wanted to know if they were gimmicky or something that they should consider. My answer was that I did not think reverse mortgages were gimmicky and that in many situations, they are a great alternative for seniors. On the other hand, I also explained that reverse mortgages used in the wrong situation can cause severe financial difficulties. In other words, it’s not whether reverse mortgages are good or bad, the real issue is how you use them.

The couple explained to me that they’re in their mid-70s, in good health and that pension and Social Security covers the bulk of their living expenses. They have some savings but they are somewhat worried about their future. Over the last few years they have been drawing down on their savings. Recently, their son asked them for a loan. He wants to start his own business and he could not get financing from traditional sources. He recommended that they take out a reverse mortgage and loan him the proceeds. They made it clear to me that it was a loan and not a gift. I asked the couple what would happen if their son’s business was not successful and he did not repay the loan. They both said that it would create financial problems as somewhere down the road they plan to sell their house and use the proceeds to downsize. My answer to them was quite simple: I would not recommend the reverse mortgage and I would not loan money to their son.

I recognize that when a child wants to borrow money, parents will bend over backwards to assist. However, they can’t do it in such a way that would cause them financial difficulties. Whenever I am asked about loans to family and friends I always tell the person to assume the loan will not be repaid. I do this because when you do loan money to a family or friend, you’re not doing it based upon the financials but rather, because of other reasons. In addition, you have to keep in mind that if someone borrows from a bank and they do not repay the loan, the bank will sue them. I am not sure that is the same thing with family and friends.

In retirement, you have to assure yourself that you have the resources to maintain your lifestyle throughout your life. That is why I always encourage retirees to constantly look at their expenses and to always know what it costs them to live a month and what they will need throughout their lifetime. If you are on the edge and you have very little cushion, as difficult as it may be, you must say no to any loan that if it is not repaid would put you in financial difficulty. As hard as that may be you must, in this situation, be a little selfish and error in your favor.

Whenever you loan money to a family or friend, you should always be cautious, particularly if you are retired. Telling a family member or friend that you cannot loan money has nothing to do with love and affection; rather, it deals with making sure you have the resources to protect yourself throughout your life.