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Annuities compared to reverse mortgages - lets compare HECM reverse mortgage versus an annuity option- which one should you consider for your retirement -there are many benefits and disadvantages to both we will explore the details and reveal which option is best for your retirement. This is a non-biased review and analysis of both programs.
Retirement can and should be the golden years of one's life, a time to reap all the rewards, enjoy the grandchildren, travel the world, and a time for self discovery. Due to the current economic downturn many seniors, even the one's that have been preparing for retirement, have found themselves in a tough financial situation. Most of their 401k's are down 30-50%, their cd's or savings account are paying close to nothing in interest, housing prices have collapsed, and social security/welfare has been slashed.
With all these negatives and much confusion surrounding both reverse mortgages and annuities, we have decided to demystify these potential retirement products and put them head to head to see which one makes the most sense for your retirement planning.
A reverse mortgage is made possible through the equity in your home , which is built up by you making payments to your mortgage, and the home increasing in value. Reverse mortgages are based on the amount of equity in your property and your age, unlike traditional forward mortgages which are based on credit score/income.
If you are like most Americans, in order to pay down your mortgage you have to work and pay on a monthly basis, which can be similar to an annuity. An annuity is an investment much like your home, and this investment can be made on an installment basis, just like paying your mortgage. If you want to with both products you are able to pay a lump sum of cash towards paying off the mortgage or buying the annuity.
The main problem with retiring is loosing a main source of income for most, and along with this problem is that of living longer than you money. Annuities and reverse mortgage try to solve this problem by providing guaranteed income or a lump sum so that seniors can finance their retirements.
WHICH IS BETTER TO RETIRE ON REVERSE MORTGAGE LOAN OR ANNUITY INCOME
So far both products seem very similar, with the main distinction being that in order to pay for a annuity , you almost need to have more money than person who is paying down just the home, assuming you own your home and don't live with relatives. This extra payment could be used towards paying the home off, and then investing elsewhere.
Advantages and Disadvantages of Annuity
Advantages of Annuity
§ Tax-deferred growth and compounding within the annuity contract
§ Guaranteed rates of return on your dollars
§ Guaranteed lifetime payments if you annuitize (in some cases you don’t even have to annuitize in order to receive this benefit)
§ One is able to craft many different types of annuity with more options ( flexible)
Guarantees above are based from the actual insurance companies, unlike the reverse mortgage which is federally backed.
Disadvantages of Annuity
§ You have to pay for the guarantees
§ Some contracts have surrender periods that can tie up your money longer than you want or charge for taking money out
§ IRS rules restrict how you take money out of an annuity
§ Distributions may be taxable and/or penalized
§ Pushy Sales ( some insurance agents and financial planners)
§ High commissions/ investment management fees which can eliminate gain from annuity
§ withdraw before age 59.5 then you will pay 10% more taxes to Uncle Sam