The Biggest Expense in Retirement
According to the Consumer Finance Protection Bureau, more people are carrying mortgage debt into their retirement years with some studies estimating that 50-68% of new retirees will have some sort of loan payment. Current retirees aren’t much better off. For those 75 and older, housing expenses account for 43% of spending.
When you combine a house payment with low savings and longer life expectancy, the prospect of eliminating a monthly mortgage payment and creating cash flow could be a real game-changer. In fact, this is one of the most sought-after features of the HECM Reverse Mortgage because of the numerous, new planning conversations it makes available. Here are ten, and I’m sure you could think of more!
1. Creating Longevity
Reducing the draw on your clients’ savings each month (by eliminating their mandatory loan payment) can greatly enhance the longevity of their savings.
In Column A, we see the clients have $300,000 in savings (starting amount), growing at 4 percent. They need to withdraw $2,000 per month (periodic withdrawals from savings) to support their current lifestyle and monthly mortgage payments. In this simplified example, assuming nothing changes, they will run out of money in seventeen years and two months (ending balance).
However, as noted in Column B, when the clients use the HECM to eliminate their existing mortgage payment, they reduce their draw by $800. Meaning they no longer need $2,000 a month, only $1,200. Instead of their savings running out in 17 years, they will last all 30 years and they’ll have nearly $150,000 remaining.
2. Budget Bridge
Often retirees have a monthly budget that is designed to sustain them for all of retirement, but sometimes leaves them lacking income or enjoyment each month. Take a look at the illustration and notice the two lines. The top line is the desired spending, and the second line is the budgeted spending.
This dilemma can cause retirees to make choices with some very serious consequences. One is to go ahead and spend beyond their budget and hope that somehow things work out, that their investments perform better than expected, or perhaps that they may not live as long as projected. Another possible solution is eliminating their monthly loan payment with the HECM reverse mortgage–increasing the amount they can spend monthly and giving them more enjoyment.
3. Mitigating Risk
Sometimes a portfolio may decline significantly in value. When this happens, it is preferable for retirees to stop drawing on the portfolio and allow it to recover. However, this raises another challenge. What funds will they live off of during that time? If a HECM has been used to eliminate a mortgage payment, the retirees can use the additional income they now receive to fund their everyday expenses.
4. Deferring Withdrawals
Social Security: Most retirees know that deferring Social Security for as long as possible leads to a much higher payout. However, some simply need the money at 62 and don’t have another resource to supplement all or part of their income while they wait. They can establish a reverse mortgage, pay off their mortgage, and use their liberated income as a bridge to delay claiming Social Security until benefits are worth the maximum amount.
Qualified Plan Maximization (IRA/401k): Creating an income bridge like in the Social Security strategy also allows retirees to defer taking their qualified savings (IRAs,401k etc) until they have to at age 70 ½ . This obviously allows them to continue to grow tax deferred and presumably have a larger benefit when mandatory withdrawals are required.
Vesting for Annuity Pay-Out: One of the benefits of a deferred annuity is its ability to grow and upon annuitization, have a larger monthly payout. This is called vesting. Though most annuities will allow you to convert to a monthly payment at most any time, there is significant benefit to leaving it in for the recommended vesting period. What happens if you need money now and are not able to leave it? You guessed it; eliminate the monthly mortgage payment and use the liberated income.
5. Life Insurance
Eliminating the monthly mortgage payment and recovering those funds can help clients purchase life insurance for retirement planning. Younger retirees can especially benefit from this as the new policies now come with long term benefits that can be built in. It could also help sustain their premium payments if they already have life insurance in place.
6. Providing a Legacy Today
Providing a cash value life insurance policy for clients’ grandchildren has some distinct advantages. The first is it’s very inexpensive to obtain! The policies usually provide a good, solid return, particularly in a low-interest-rate environment. Also, the plans usually offer tax-deferred growth, and many come with guaranteed returns, meaning your money will increase regardless of what happens in the financial markets as long as you keep making premium payments.
Unlike money kept in other savings vehicles for grandchildren, such as 529 college savings plans and Coverdell Education Savings Accounts, a juvenile life insurance policy’s cash value doesn’t have to be used solely for education but can be used by a grown child for other purposes, such as wedding expenses or to launch a business. An added bonus is that children who have permanent, cash-value life insurance won’t have to worry about qualifying for a policy as an adult. Juvenile insurance guarantees the future insurability of the child, regardless of their future health, lifestyle or residence. It’s issued without any physical exam whatsoever.
And finally, since your clients are the owners of the policy until they voluntarily transfer ownership to their grandchild, if needed, they can borrow from the cash value of the policy for whatever retirement needs may unexpectedly arise.
7. Healthcare/Long-Term Care
The ability to cover the potential expenses of long-term care by purchasing some sort of insurance policy is very wise. One of the concerns retirees have is if they can qualify medically and if so, how will they cover the premiums. The newly liberated income could fit perfectly in this situation.
8. Family Resource
Most retirees have some desire to pass on a financial legacy to their heirs. According to the student loan giant, Sallie Mae, as the cost of higher education continues to grow, the reliance on family contributions to keep up has increased as well. The cash flow liberated from the reverse mortgage could allow a grandparent to assist with a small monthly tuition stipend, a gift or even a low or no interest loan to their grandchildren.
9. Creating Deferred Income
For some of your clients, their monthly loan payment is not a burden. If this is the case, they can continue to make the monthly mortgage payments they would have been paying anyway and use them to reduce the outstanding balance of the HECM, while simultaneously adding funds to the available and growing line of credit for tax-free access in the future. This can create a large reserve fund for unexpected expenses or large expenses like long-term care.
10. Rightsize and Re-Imagine
In 2008, as part of the Housing and Economic Recovery Act (HERA), the U.S. Department of Housing authorized the HECM for Purchase (H4P). This reverse mortgage allows retirees to purchase a new home with the proceeds of the HECM financing a portion of the purchase price. A new home usually can be purchased with around a 50 to 60 percent down payment and requires no monthly mortgage payments.