Before getting into the ways a reverse mortgage can help you in planning your retirement income, let’s just review what a reverse mortgage is all about.
Just like the name states, a reverse mortgage is pretty much the opposite of a regular mortgage. With a regular mortgage, you borrow money from a bank to buy a home. As you make monthly payments to the bank, you pay down the loan and increase your equity in your home.
With a reverse mortgage, the bank pays you to buy the equity in your home.
So, with a regular mortgage, ownership of your home shifts from the bank to you. With a reverse mortgage, ownership shifts from you to the bank.
To qualify for a reverse mortgage, you must be at least age 62 and live in your home.
That’s about as simple as I can make it. If you need a better explanation, just shoot me an email (joebaker@bakerassetmanagement.com).
Okay, now we know that a reverse mortgage basically unlocks the equity in your home (an illiquid asset) so you can use it for other purposes, like upgrading your retirement plan. Here’s a couple ways you can do that:
- You can delay Social Security and pension payouts. Instead of taking your social security benefits at age 62 or even your normal retirement age, you can use the cash from a reverse mortgage to help pay for expenses. Meanwhile, your social security payments will increase at about 8% per year until age 70. This will give you a much higher payment than if you started receiving it earlier.
- You can postpone withdrawing from your 401k or IRA, allowing them to grow tax-deferred. This is the same strategy as described above with social security.
- You can create an income stream to help fund your healthcare costs. Instead of having one of your biggest assets, your home, locking up a big chunk of your wealth, you can use a reverse mortgage to fund your health care. This can allow you to keep your retirement funds intact and prevent you from selling your investments when you don’t want to.
- You can have annuity-style payments using your home’s equity. With a reverse mortgage, you are able to choose the option of receiving your funds in annuity-style payments. This is perfect for people who would rather have a predictable income stream.
- You can replace cash reserves. Some people have less cash in reserve than they would like. A reverse mortgage gives you the chance to catch up and replace your cash reserves, getting you up to speed financially.
Now, don’t go signing up for a reverse mortgage just yet. You definitely need to speak to properly licensed reverse mortgage specialists to make an informed decision.
If it does make sense for you, a reverse mortgage could be just the strategy your retirement plan needs.
Joe Baker, CFP
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
