Reverse mortgage retirement strategies

Though reverse mortgages were traditionally intended to help cash-strapped seniors generate extra income from their home equity, their flexibility and versatility have made them a valuable retirement income planning tool.

Below are several retirement income planning strategies where a reverse mortgage can be useful. When considering these and other strategies, you should always consult with financial experts who can assess your individual situation.

Delay Social Security benefits
The longer you wait to start receiving Social Security benefits, the higher your monthly payment. Some seniors, however, can’t wait until the mandatory maximum age of 70 1/2 to start drawing Social Security.

But an option is to obtain a reverse mortgage, using the proceeds from the loan as income. The longer you can use a reverse mortgage instead of Social Security, the more you can later maximize your monthly benefit.

Allow retirement accounts to accumulate before making withdrawals
If you have a tax-qualified retirement plan such as a 401(k) or IRA, you legally don’t have to withdraw funds until after your reach age 70 1/2. One way to give your retirement accounts more time to grow is to obtain a reverse mortgage.

A monthly tenure payment option will provide a lifetime monthly payment based on your age, the value of your home and market interest rates at the time you closed on the reverse mortgage. Once you reach 70 1/2, you can then take required minimum distributions to replace or supplement the reverse mortgage income.

Or you can choose a specified term for the reverse mortgage payments, which will pay a higher monthly amount than a lifetime tenure option. If you are 65, you could choose a five-year term for the reverse mortgage, then begin tapping into your requirement accounts at age 70 when it’s required.

You would essentially be replacing the reverse mortgage income with the retirement account income. The retirement accounts would have those extra years to accumulate assets, but the total asset base would not to have to last as long as it would without the reverse mortgage option.

Preserve your other retirement assets
You can also utilize a reverse mortgage strategy to avoid compounding the effects of down markets by withdrawing funds from a retirement plan that is underperforming.

Imagine if you withdraw 5 percent of your retirement account balance at the beginning of the year for living expenses. In a perfect world, the account value would grow 5 percent the rest of the year based on investment performance, essentially replacing what you withdrew.

But we don’t live in a perfect world. Consider what would happen if you withdrew 5 percent at the beginning of the year, then a down market caused another 10 percent drop in the account value. Now, after just one year, you have 14.5 percent less money than what you started with.

But it gets worse. To withdraw the same dollar amount in year two that you did in year 1, you would have taken out about 5.8 percent of the account value at the beginning of the year. If you do that, the account will have to grow nearly 20 percent for the year to get back to where it started on the first day of your retirement.

Having a reverse mortgage credit line can help you minimize the impact of market losses on your 401(k) or IRA.

Eliminate your monthly mortgage payment
Experts suggest that seniors eliminate as much debt as possible before entering retirement so that they can efficiently use the income from their retirement plans on living expenses and other needs.

If you still owe a balance on your conventional mortgage, you can potentially retire it using a reverse mortgage. The first part of your reverse mortgage loan amount will go toward paying off the conventional mortgage balance. Anything left over can be placed in a line of credit or annualized into a monthly income stream.

Reverse mortgages do not require monthly payments. The loan is due all at once after you pass away or move out of the home. Reverse mortgages are typically repaid by selling the property. Plus, the balance of the loan can never be more than what you can sell it for.

Generate tax-free income
Because it’s a loan, reverse mortgage income is not taxable. Therefore, you can increase your income amount without an additional tax bill.