For years, popular thinking, indeed even scholarly research suggested that a reverse mortgage was a bad thing. Then we started to see Magnum, Tom Selleck (the original Magnum PI) plugging the advantages of a reverse mortgage. In the last few years, several thought leaders in the financial planning industry, such as Wade Pfau1 have completed research papers concluding that a reverse mortgage could be a useful tool. As with many things in life, it all depends on your specific situation.
Here are five things that make a reverse mortgage worth investigating:
1) You are a young retiree.
You (or your spouse/domestic partner) must be at least 62 years old to qualify for a reverse mortgage. The younger you are, the more flexibility the reverse mortgage gives you. Think of your assets in a couple of buckets – tax-deferred buckets such as 401k and IRA savings accounts, taxable investment and savings accounts, and your home.
Typically, your home is one of your larger assets. If you tap into this instead of pulling out of your other accounts, research shows that if done from a “right” timing perspective, it will allow your total net worth to be higher than merely tapping into your financial accounts.
2) You have paid off your mortgage.
For many of us, it feels good to not have to make a mortgage payment in retirement. But if your house is worth $500,000 or more, its an asset you are not tapping into until you sell the house. Using a reverse mortgage allows you to tap into this other “bucket” of assets, thereby reducing the draw on your other financial assets.
3) You have a high percentage of your financial assets in accounts like 401k and IRAs that are taxed every time you take a distribution.
So if you need $100,000 annually to fund your lifestyle in retirement, you will have to pay taxes on the $100,000 as ordinary income. Between state and federal taxes, that could be between 20% – 35% tax on that withdrawal. Pulling some of your living expenses from your home equity instead may lessen your tax burden.
4) You work with a financial planner.
The research completed by Pfau shows one of the benefits of home equity as another bucket of assets to use is to do so in years of bad markets. That way, you are not pulling form your assets and selling them to fund your lifestyle in a down market. We work with our retired clients to hold cash to cover living expense for 18-24 months to fund their lifestyle needs so they don’t need to sell in a down market.
However, this money is earning much lower rates of return. Thus using home equity could allow you to hold less cash, putting more of your money in your financial accounts to work – but also more at risk.
5) You plan to live in your house for 10 or more years.
Even better, if you can age in place, the longer you stay in the house, the value of the house and the money available to you through the reverse mortgage grows. Having a reverse mortgage gives you additional flexibility. Most of the research is based on people dying in their homes versus moving into other assisted living or other communities.
If you are nearing retirement or are a young retiree, determining whether a reverse mortgage makes sense for you is worth the effort. It still might not make sense. At Aspyre Wealth Partners, we can help you determine how best to use the assets you’ve accumulated during your working years so that you can fully enjoy retirement!
Joni Lindquist, CFP®, MBA; is a Principal at Aspyre Wealth Partners. When not walking or hanging out with Quincy her golden retriever, she is a career/executive coach and financial planner, helping clients reach for their aspirations. Aspyre helps clients Master What’s Next, no matter what phase of life they are in.
1. “Reverse Mortgages: An Important Retirement Income Tool”, Financial Advisor, APRIL 4, 2017, WADE D. PFAU