With pensions giving way to 401(k) plans, the future of social security being uncertain and people living longer, the retirement landscape seems to be changing. “According to the Employee Benefit Research Institute (EBRI), Americans are vastly unprepared for retirement to the tune of roughly $4.13 trillion.”1 For many retirees, social security supplies a majority of their income, with savings and home equity making up the remainder. In a recent article from Forbes, it was stated that for the average married couple, social security makes up 60% of retirement resources, 27% is made up of home equity, and 13% comes from non-equity assets.1 While social security and savings get a lot of attention during the financial planning process, home equity is often overlooked as a possible source of cash flow. However, this may be starting to change. Home equity can be used effectively as part of a comprehensive retirement plan to enhance retirees overall financial security.
A population of more than 30 million baby boomers are moving into retirement in the coming years, and a large portion of them want to stay in their homes.1 For those that are facing a retirement shortfall, tapping into their home equity through a reverse mortgage could be part of the solution. A Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, is a Federal Housing Administration insured loan. A HECM enables seniors to access a portion of their home’s equity to obtain tax free2 funds without having to make monthly mortgage payments.3
Below are four ways a reverse mortgage loan could be used strategically to help improve the health of one’s retirement income plan:
Deferring social security
Let’s say you want to retire at 62, but can’t afford to without drawing on your social security benefits. One way to accomplish this, without losing your full benefit amount, is to defer drawing on your social security, and replacing the loss of income with monthly loan disbursements from a reverse mortgage. This can be a great option for someone that wants to retire early or is concerned about outliving their money.
Stretching retirement savings
Rather than taking withdrawals from your retirement accounts, you can increase the longevity of your portfolio by using a reverse mortgage loan to supplement your income. You could choose to receive the loan proceeds in monthly payments or as a line of credit to use when needed. The other advantage to using this strategy is that it allows time for investment recovery in a down market.
Letting your Roth IRA grow
While many retirees have money in traditional IRA’s and 401(k)’s, it’s less common to see Roth IRA’s. However, Roth accounts offer a couple major benefits. First of all, they’re not subject to the required minimum distribution at age 70 ½. In addition, since you pay taxes upfront when you contribute, you don’t have to pay taxes on withdrawals in retirement. 4 If you have a Roth or do a Roth conversion, but would prefer not to touch that money and let it grow, a reverse mortgage is one way to supplement the income you would have received from your Roth.1
Increasing cash flow and reducing debt
When you obtain a reverse mortgage, you must pay off any existing liens. Therefore, homeowners with sufficient equity can use a reverse mortgage to pay off any outstanding balance on their mortgage and free up some cash flow. The extra funds could be used to pay off other debt or even saved for a rainy day.
If you’d like to learn more about reverse mortgages or want to find out if you’re eligible, call 800-218-1415.
1 Reverse Mortgages Can Be A Retiree’s Saving Grace – forbes.com, by Jamie Hopkins, 10/7/15, http://www.forbes.com/sites/jamiehopkins/2015/10/07/correctly-using-reverse-mortgages-can-be-a-retirees-saving-grace/.
2 Consult your financial advisor and appropriate government agencies for any effect on taxes or government benefits.
3 You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance and maintain the home according to Federal Housing Administration requirements.
4 Consult your financial advisor regarding financial products.
Author: Meredith Manz