While in the mortgage business in Overland Park, Kan., I personally originated a dozen reverse mortgage loans. Eleven of them solved an immediate cash-flow crisis for the client, while one was used for long-term planning.
That one was recommended by a savvy financial planner, and friend of mine, who recognized his client was outspending his investments. He was on the road to a financial disaster 15 to 20 years later. Our planning and execution of a comprehensive plan that incorporated home equity into his funding stream made it possible for this client to continue to live and pursue his retirement goals. Had my friend ignored home equity like a blindspot, as so many planners do, his client would have needed to make dramatic changes to his financial plan and lifestyle. It was an important lesson that I carry with me today as a planner myself.
The utilization of a reverse mortgage adds more liquidity to a client’s financial plan by unlocking home equity to create tax-free cash flow. Incorporating a reverse mortgage and coordinating spending from home equity throughout retirement offers a way to meet spending goals and provide a larger legacy. It can solve a multitude of planning problems and make it possible for investments to continue to grow. Rather than wait until the last minute to factor housing wealth into a funding equation, I always consider whether the following strategic uses of a Home Equity Conversion Mortgage (HECM), aka reverse mortgage, could benefit my clients who are 62 and older.
Delay The Start Of Social Security
Your client wants to start claiming Social Security at full retirement age of 66, but you believe it is in their best interest to wait until 70 and receive the higher amount. The delay creates a $2,000/month shortage for four years, or an unfunded liability in the range of $80k-$100k depending on your client’s income tax bracket. How will you fund the shortage?
Consider using the proceeds from a HECM loan. Using this online calculator, you will see that a 66-year-old whose home value is $200,000 would be able to access about $102,000 in home equity with an adjustable rate reverse mortgage; enough to replace the cash flow Social Security would have provided between age 66 and 70.
If delaying Social Security results in an increase of $10,000/year, this would be the equivalent of the client having access to another $250,000 to safely withdraw from for the rest of his/her life. Using the reverse mortgage in this context is financial leverage and mitigates the risk of outliving retirement funds even after you factor in the loan’s costs.
The delay strategy also gives your client time to either spend down IRA investments or convert to ROTH. Both help to avoid the possibility of the “tax torpedo” coming from higher taxes on Social Security due to higher MAGI.
Buy A New Home
Your clients want to move out of the old two-story, $250,000 home and “right-size” into a house that will provide more safety and accessibility as they age. Here in the Kansas City metro area, $400k-$500k is the approximate price for a single-level property that would include multiple other long-term care and community-type benefits.