Can a Reverse Mortgage Replace the Once Commonplace Pension?

Historically, retirement income for most Americans generally came from three sources:  social security, pension and retirement savings.  This has often been referred to as the 3-legged stool.  However, now companies are shifting away from offering pensions, also known as defined benefits, to offering defined contribution plans or 401(k)’s.  The once 3-legged stool is now becoming a 2-legged stool.1

Could a reverse mortgage replace a pension?  As the trend towards 401(k)’s continues, seniors running short on retirement funds may be looking for ways to supplement their income.  According to a recent article by Dr. Don Taylor, a financial planner, writer and Finance professor, he believes that while reverse mortgages aren’t right for everyone, “…they will become increasingly important as a source of retirement income to seniors over time.  Reverse mortgages may become the 3rd leg of the stool.”1

If you’re not familiar with reverse mortgage loans, the most common type is a HECM, or Home Equity Conversion Mortgage.  HECMs are insured by the Federal Housing Administration.  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.You can receive the loan proceeds in a lump sum, monthly payments or as a line of credit.

The concept of utilizing a reverse mortgage as part of a comprehensive retirement strategy has received more attention over the last couple years.  One example would be using your home equity through a reverse mortgage line of credit.  This strategy can be used to supplement withdrawals from your retirement accounts in order to help mitigate sequence of return risk.  Another example would be using the additional funds from a reverse mortgage to defer collecting social security.  Dr. Taylor advocates delaying social security benefits until at least full retirement age for most seniors.1  One way to accomplish this is to replace the loss of income you would have received from social security 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.

If you’d like to learn more about the strategic uses of a reverse mortgage and how home equity might fit into your retirement plan, try our Reverse Mortgage Calculator or call us today at 800-218-1415.

 

1 Can a Reverse Mortgage Replace a Pension? – bankrate.com, by Dr. Don Taylor, 1/28/16, http://www.bankrate.com/financing/senior-living/can-a-reverse-mortgage-replace-a-pension/?tc=eml.

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.

Author:  Meredith Manz