Larry Benton, CSA
The Reverse Advisor
April 30, 2015
In the past, the main purpose of a Reverse Mortgage was to help seniors to fulfill cash needs by allowing them to pull the equity in their homes. But today, many seniors are finding that even if they don’t particularly need to fulfill a cash need, they can take advantage of the benefits of a reverse mortgage as a tool to use strategically in retirement planning. Here are 8 ways a reverse mortgage be used as a financial planning tool.
- You can delay Social Security and pension payouts
Some seniors may financially need to use payouts from Social Security and pensions as soon as they are available. However, with the tax-free cash from your reverse mortgage, you will be financially sound enough to wait on receiving those payouts, thus increasing how much you receive.
- You can draw on tax-free funds to reduce tax liability
Income from a reverse mortgage is tax-free! This cannot be said for many other types of income you may earn. So it is a great advantage to be able to use your home’s equity as income, without losing a cent of it to taxes.
- You can postpone drawing down retirement assets, giving assets more time to grow
This idea follows the same formula as your Social Security and Pension payouts. The longer you can delay in receiving your benefits, the longer they have to grow. With a reverse mortgage, you can afford to wait.
- You can increase your cash flow by eliminating monthly mortgage payments
Every month, a monthly mortgage payment takes a chunk out from your income. But with a reverse mortgage, your existing mortgage is paid off. This leaves you with extra money in your pocket that would have normally gone to paying your existing mortgage.
- You have access to a low cost, non-cancelable, GROWING line of credit
With a reverse mortgage, you have an ever-growing line of credit available to you. It grows with time. This means that the line of credit available to you years from now will be much larger than the line of credit available to you now… and, unlike a bank HELOC, is non-cancelable.
- Standby Reverse Mortgage (SRM): You can protect your portfolio performance in a down market**
In a down market, your portfolio and cash flow may not be at its peak performance. Many Retirement Planners recommend two buckets 1) Retirement Asset Funds and 2) Reserve Cash account to use when market conditions depress earnings; these planners are now recommending a SRM as a third bucket in the event of extended market lags (or a 2nd bucket where no cash reserves exist). With two (or three) retirement buckets, a reverse mortgage acts as the buffer, the incoming funds are able to protect you until the market picks back up again, and then the Standby Reverse Mortgage can be replenished… extending retirement funds longer.
- You can have annuity-style payments using your home’s equity
With a reverse mortgage, you are able to choose the option of receiving your funds in annuity-style payments. These can supplement your existing income This is perfect for some types of people who would rather plan their income as a steady flow.
- You can replace cash reserves
Some people have less cash in reserve than they would like. A reverse mortgage gives you the chance to catch up and replace your cash reserves, getting you up to speed financially, and these reserves grow over time..
These are just a few examples of how you can use a reverse mortgage as a strategic tool. With the right plan in place, you will be well on your way to a solid retirement.
** Analytical witepapers by John Salter, PhD, CFP available by request:
1) “Tap into Potential Retirement Wealth Utilizing the HECM” 2014
2) “Standby Reverse Mortgages: A Risk Management Tool for Retirement Distributions” 2013
Larry Benton, CSA