We’ve seen the headlines of financial shortfalls predicted for Social Security and Medicare. Nobody really thinks Social Security is going to totally cover the cost of retirement. A study conducted by the National Association for Variable Annuities found that running out of money is the number one fear of retirees. Add to that the desire for a more active lifestyle and the quest to fulfill lifelong travel, hobby, or other dreams, and the question of how to pay for a lengthy and fulfilling retirement is magnified even greater.
So how are we going to pay for this exciting, fulfilling stage of life called retirement? A reverse mortgage is my favorite answer. Before you consider a reverse mortgage, however, you should consider other options for financing your later life. No financial solution is one-size-fits-all.
The options for retirement financing include:
Option 1: Social Security. While payments are determined by age and earnings, most people receive $800- $1200 month, or receive as much as $2,700 per month if they were a high earner and waited until age 70 to begin collecting benefits. Most people are penalized for collecting retirement early (that is, beginning at age 62), and what Social Security considers the full retirement age continues to rise. For the tail end of the Baby Boomers, full retirement age is 67. To find out about your personal situation, visit
www.socialsecurity.gov or call 1-800-772-1213.
Option 2: Savings. Savings for retirement are usually in the form of an IRA (Individual Retirement Account), Roth IRA, or 401(k). In most instances, money can be withdrawn, without penalty, at age 59 1/2. However, these withdrawals may be taxable, and the benefits may affect the amount of your Social Security check. Simply using money in your savings account or Certificate of Deposit (CD), however, is non-taxable.
Option 3: Part-time work. This is a great way of staying active while also adding to the cash available for retirement. However, depending on your birth year and your age at retirement, you may lose part of your Social Security benefits.
Option 4: Tap the kids. It’s payback time! You can move in with the kids and drive them nuts, or they can move in with you and assume the expenses (and drive you nuts as well). For those who would like this option better if close quarters weren’t involved, perhaps your children could send you a monthly check. If they provide enough of your support, they can also claim you as a dependent on their income tax, perhaps providing them with an unexpected tax break. Or, consider borrowing from your children, with an agreement that the payback will be in your will.
Option 5: Sell the House. This may look good on paper, but in most cases, our homes are more than a financial instrument. Most of us would prefer to remain where we are. Even if you do sell your home, where will you live? You will have to find another place to buy or rent, one that comes with a lower housing payment. That often means moving to a state or country where you don’t know anyone.
The financial pitfalls of selling your home and moving somewhere else also need to be considered. If your home sale exceeds $250,000 (if you are single) or $500,000 (if you are married), you will owe capital gains taxes. Move into an assisted living community, and you not only have the cost of moving, but also a monthly fee.
Monthly fees in assisted living facilities range from about $1,700 to $4,700 per month (with a national average of about $2,900 month).
Option 6: Refinance. Refinancing your home puts you into a new regular, or forward, mortgage. Thus, instead of generating positive cash flow (money coming in), you are generating negative cash flow (money goes out). You are betting against yourself, believing you will die before you run out of money.
Option 7: Reverse Mortgage. When compared with other retirement financing options, reverse mortgages have a number of distinct advantages:
*You have no payments.
*You continue to own your home.
*The mortgage gets bigger each month, but your home value often goes up regularly, too.
*Consumer protections, from a required, pre-application counseling session to a three-day right of rescission, are built into every reverse mortgage in the United States.
*The mortgage is insured by either the Federal Housing Administration (FHA) or the private lender, meaning you can never lose money.
Of course, there are a lot more details that you will need to consider before you apply for a reverse mortgage, from the type of loan to the type of payments (e.g. monthly or lump sum, for example). These choices can be used to tailor the reverse mortgage to suit your own personal circumstances. For more information on the details of reverse mortgages, visit my web site, www.ReverseMortgageBook.com, and order my book, Reverse Mortgages – Cash for the Rest of Your Life!