Reverse Mortgages in Retirement
Reverse mortgages are powerful tools that can enhance your retirement plan. Here is a situations in which reverse mortgage is a good move. Steve Resch RETIREMENT DAILY GUEST CONTRIBUTOR JUN 13, 2022
To help illustrate how reverse mortgages can be leveraged in a financial plan, here is a hypothetical situation that illustrate where these loans can improve the financial stability of borrowers.
Scenario #1: Reduce Asset Distribution Rates
Terry and Maya are both 66 years old. They own a home worth $2.5 million and have $1.5 million in retirement assets. They would like to retire; however, they have a $600,000 first mortgage lien with monthly principal and interest payments of $2,500. Because of this, they calculate they will need to withdraw about 6% per year from their retirement assets to cover their expenses, which is well above the 4% rate that most advisors would suggest.
Since a reverse mortgage doesn't require the monthly principal or interest payments, this couple can use the loan proceeds to cover their expenses and lower their asset distribution rate from 6% to 3.5%. Because they will be retaining more of their invested assets, it could help offset any loss of equity from the reverse loan.
One of the main reasons homeowners get a reverse mortgage is to eliminate a monthly mortgage payment. For Terry and Maya, it was to help preserve invested assets; in other cases, it could simply be to free up monthly cash flow. The extra money can go a long way to help balance the household budget or even pay for other retirement essentials such as a long-term care (LTC) plan.
About the author: Stephen Resch
Stephen Resch is the vice president of retirement strategies at reverse mortgage lender Finance of America Reverse LLC. The views expressed in this article are those of the author alone and do not necessarily reflect the views and opinions of his employer. This article is not intended to provide financial planning, wealth management, or tax advice. For tax advice, please consult a tax professional.
