Is There A Tangible Net Positive Impact Of A Retiree Eliminating A Monthly Mortgage Payment?
Can it make a difference in the overall outcome of a retirement plan?
Here’s an example of a couple that has done moderately well in savings, perhaps better than most boomers entering retirement. Based on their lifestyle, their advisor suggested a $2000/month draw from their savings (and adjust for inflation each year).
Their question is:
If We Choose To Do This, How Long Will Our Money Last?
The results show that if their savings grew steadily at 6% (without any significant mulit-year downturns i.e Sequence of Returns Risk), they would run through their savings at around age 81.
If at age 81, they were still alive and active, they would then need to make some choices.
Choice #1: THEY COULD GO BACK TO WORK.
Not likely for 81. But many retirees believe they will need to work longer to come even close to the retirement they desire.
Choice #2: THEY COULD CHANGE THEIR LIFESTYLE.
This could mean moving to a smaller place, cutting back on things they enjoy, etc. Although many advisors find this very practical and strategic, many clients would like to make the choice themselves instead of being forced into it by depleted savings.
Choice #3: THEY COULD THEN THINK ABOUT A REVERSE MORTGAGE
This is called the “Reverse Mortgage as a Last Resort” strategy. Beginning in 2011, financial thought leaders across the country have debunked this strategy for this type of client. As a matter of fact, some have be as explicit as to say it’s the absolutely wrong view to have. (See www.HECMAdvisorsGroup.com – Search “Last Resort)
There could certainly be other options and combinations, but those choices will be limiting and challenging.
But there is another way.
A Pro-Active Approach…
What if this couple was able to establish a Reverse Mortgage at the onset of their retirement. Would the results be any different?
1. They would execute a HECM Reverse Mortgage.
2. They would pay off their existing mortgage with the proceeds of the Reverse Mortgage.
3. They would free up a payment of $700 a month.
By doing this one thing, they reduce the draw on their savings from $2000 a month to $1300
Does Eliminating a Mortgage Payment Make a Difference?
So what see here, (all things being equal) is that by simply reducing the draw against the savings down to $1300 we EXTEND THE LIFE of the Savings by nearly 14 YEARS.
Now instead of running out savings at 81 they extend to age 94
Will It Work For My Client?
Every scenario is as unique as the client.
- Some will not have a LONGEVITY need as this client did, but will rather have a
- LIFESTYLE need. Meaning though they can afford to make the monthly payment and their savings are predicted to last 25-30 years, they would still like to have the extra $8,400 a year ($700 x 12) to enjoy a few more things and not have to be so concerned about their budget.
- Still a third group has a LEGACY concern. They are comfortable both with funds and budget, but they have heard that there is a way a way to turn that money saved from a monthly loan payment in a sizable Life Insurance policy for their heirs or into Long Term Care insurance protection for their portfolio.
The most important question is not “Will it work for every client?”, the most important question is:
Is a Part of the Conversation?
Will it Work with a Higher End Client?
Below is a Basic Example what Eliminating a $1,600 Monthly Mortgage Does to a $2 million dollar portfolio.
The Difference is Substantial!
There are many ways advisors help their clients achieve the type of retirement they desire. Paying off a mortgage is one very substantial way to help towards that goal.
Be sure to search “Paying off a Mortgage” in our search bar for other articles on the subject, and feel free to reach out to me for any case studies or examples you would like to see demonstrated.
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