The Forbes article repositions reverse mortgages as a valuable tool in retirement planning, countering the outdated belief that they should be considered only as a last resort. It highlights five practical uses of reverse mortgages to enhance retirement income strategies:

Spending Coordination With Your Portfolio:

A reverse mortgage offers retirees a standby line of credit that can be used to avoid selling investments during market downturns. This approach reduces the need to withdraw from an investment portfolio at inopportune times, protecting retirement savings during periods of poor market performance. The reverse mortgage line of credit can grow over time, providing a flexible source of funds that can be repaid when investment returns improve.

Bridge Income for Delaying Social Security:

Delaying Social Security benefits until age 70 increases the payout, but it can leave retirees without a stable income source in the interim. A reverse mortgage can act as a bridge, providing income to cover living expenses while Social Security benefits grow. This strategy allows retirees to optimize their Social Security benefits without having to rely solely on their investment portfolio or savings during the delay period.

Below is a video case study by Dr. Tom Davison, illustrating the impact of using a Home Equity Conversion Mortgage (HECM) to delay Social Security draws for higher-net-worth individuals. This approach highlights how strategically utilizing a reverse mortgage can significantly enhance long-term retirement outcomes and provide greater financial flexibility.

Funding Roth IRA Conversions:

Retirees may want to convert traditional IRAs or 401(k)s into Roth IRAs to create a tax-free income source later in retirement. However, this conversion requires paying taxes upfront, which can be challenging without liquid cash. A reverse mortgage can provide the necessary funds to pay the taxes associated with a Roth IRA conversion, spreading the tax burden over time and potentially reducing long-term tax liabilities.

Below is a 30-minute webinar from my friend, Dr. Barry Sacks, that explores the benefits of using a Home Equity Conversion Mortgage (HECM) to facilitate Roth IRA conversions, offering a strategic approach to managing retirement income and taxes more efficiently.

Providing Larger Inheritances:

While reverse mortgages have costs (such as interest and fees), using home equity for retirement income can protect other investment assets, allowing them to grow and potentially resulting in a larger inheritance for heirs. Additionally, a reverse mortgage protects against a decline in home value, as the amount of available borrowing grows over time, regardless of housing market fluctuations. Heirs are not liable for any debt that exceeds the home’s value when the property is sold.

Below is a graph from Dr. Wade Pfau that shows how using a reverse mortgage for income, rather than drawing from a portfolio after a down market, significantly increases the probability of leaving a larger legacy to heirs. By preserving investment portfolios during market downturns, the reverse mortgage serves as a financial buffer, allowing the portfolio to recover, which can greatly enhance the value of the inheritance left to future generation

Contingency Fund for Unexpected Spending Needs:

A reverse mortgage can serve as a safety net for unexpected expenses, such as medical emergencies, long-term care, or family financial support. It can also help cover long-term care insurance premiums, providing an additional source of funds for in-home care. However, reverse mortgages are better suited for in-home care than nursing home care, as borrowers typically cannot keep a reverse mortgage open if they are away from the home for more than a year.

By offering these five strategies, the article underscores the importance of considering reverse mortgages as part of a broader retirement income plan, rather than viewing them as a last-resort option.

Feel free to contact us at www.HousingWealthInstitute.com 

Citation:
Krishnaswamy, N. (2016, October 12). 5 ways a reverse mortgage can help your retirement. Forbes.
https://www.forbes.com/sites/nextavenue/2016/10/12/5-ways-a-reverse-mortgage-can-help-your-retirement/