Reverse Mortgages: Uses in Financial Planning
In our previous blog post Reverse Mortgages: the What and the How, we brought you an introduction to the key features of a reverse mortgage and who might benefit from them. In this post, we elaborate on who would reap the most benefit from a reverse mortgage and detail a scenario where using this strategy proves extremely useful.
To review, you can qualify for a reverse mortgage if you have either no mortgage or a very modest one, are age 62 or older and meet the FHA guidelines similar to most mortgage applications. However, just because you qualify for a reverse mortgage does not necessarily mean it will be a valuable strategy for you. Here are some of the factors that tend to make using the reverse mortgage strategy especially useful:
- Relative to your financial situation, being able to obtain a significant reverse mortgage line of credit. For example, qualifying for a reverse line of credit which can cover at least 3 years of your basic retirement lifestyle needs.
- Given your other retirement income sources, having a material level of social security benefits. Delaying these benefits significantly increases their value.
- Higher tax rates (for example, combined federal/state rate of at least 20%) with a large proportion of your portfolio in pre-tax accounts (IRAs). Reverse mortgage draws are tax-free while pre-tax IRA withdrawals are taxable.
One of the most beneficial applications of this strategy is to use the reverse mortgage line of credit as a source of funding until delayed social security benefits begin. Delaying Social Security past age 62 to your full retirement age (FRA) increases your benefit by 33%.
Even better, for every year you choose to delay your benefits after FRA, your benefit is increased by another 8%. This means that if your FRA is 66, delaying your benefits until age 70 allows for a 32% increase in benefits for the rest of your life! For many people, choosing to delay benefits until age 70 allows you to break even with taking the earlier FRA benefit by around your late 70’s to early 80’s. This increase in lifelong benefits can have a large positive impact on your chances of being financially successful in retirement, especially if you anticipate living into your late 80’s or even 90’s.
It can be emotionally difficult for many people to think about delaying their social security benefits. At retirement, social security benefits provide a steady income stream to help replace some of your lost wage income. Without social security income, you may need to take a much higher percentage withdrawal from your investment portfolio to cover retirement lifestyle spending. Making relatively large value investment withdrawals early in retirement is an uncomfortable feeling for many retirees, especially during periods of significantly down investment markets.
Making use of a reverse mortgage line of credit allows you to delay larger withdrawals from your retirement portfolio by using the tax-free draws to help fund the gap from retirement to social security benefits. And remember, unlike a traditional home equity loan, a reverse mortgage line of credit is always available as long as you remain in your home.