Retirement Income Blog

If you are retired, you may have discovered that your current income is insufficient to meet your living expenses, especially if you have unexpected medical or funeral bills.  In many cases, either liquid assets or insurance will be sufficient to meet these needs.  But in some cases, neither of these avenues is available.  Therefore, in order to meet your financial obligations, you may need to examine an important source of equity that you have probably spent much of your life accumulating the equity in your home.  New mortgage products that are now available on the market can be an invaluable source of tax-free income for needy seniors like you.  These programs are for seniors aged 62 and older that have either paid off their homes or have very low mortgage balances. 

There are two main types of reverse mortgages available to the public: federally insured reverse mortgages backed by HUD, and retail reverse mortgages backed by corporate lenders.  These mortgage products quite simply are designed to pay out a portion of your home’s equity in cash.  This will either take the form of a single, lump-sum payment, a set monthly payment (that continues either for a set period of time or for as long as you own your home) or most commonly as a line of credit.  For example, say you are living on a fixed income.  Then, a health issue arises that requires monthly bills to be paid, which are not covered by your insurance.  If you have no liquid assets set-aside to cover these costs, then you could take out a reverse mortgage on your house and receive a tax-free monthly (or single) payment to match your expenses.  Of course, the amount you are eligible for will obviously depend on such factors as the value of your home, current interest rates, your age and local lending limits.  A key advantage that these programs offer is that there is no medical underwriting of any kind involved, so any medical conditions that you may have will not prevent you from qualifying.  There are also no limitations on how the proceeds from a reverse mortgage can be spent; the funds can be used for anything.  If you are looking for an additional source of funds and would like to know more about whether a reverse mortgage is right for you, you can get no obligation quites form reverse mortgage lenders in your area.  

Note that as with any mortgage, there are points and other costs associated with the origination of the mortgage.  Interest rates for reverse mortgages generally are higher than traditional home mortgages and home equity loans. Additionally, fees and expenses associated with reverse mortgages are also higher than fees typically applied to traditional mortgages – sometimes as high as 4% to 8% of the mortgage loan amount. In addition, while typically there are no taxes on the proceeds of a reverse mortgage, the income or lump sum received could impact eligibility for various state and federal benefits, including Medicaid. Further, depending on the laws of a state, a reverse mortgage may not enjoy the same home-equity protection that would otherwise apply if a homeowner had a health emergency and needed to enter a nursing home. Reverse mortgages should not be used to speculate with home equity.

Before you obtain a reverse mortgage, federal rules require that you have an education session with a government appointed consultant to make sure you understand all of the terms and so that you can ask your questions to an impartial source.

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In economic downturns everyone tends to tighten their budgets, and that includes retirees. In fact you may find you’re actually saving in retirement after paying your regular expenses. So where should you put this ‘extra’ savings as a retiree?

You may tend to just put it into your retirement savings into a bank account. But that makes your money vulnerable to inflation and unable to participate in market upturns. Its earnings are also taxed yearly - you may as well put it under the mattress.

Better to make it work toward ensuring more for you in the future. At 65 you statistically have some 20 years of remaining life expectancy. Long before that time elapses, both inflation and economic upturns will affect your holdings.

Presuming that you’ve stashed anywhere from 1 to 2 years of easy-to-access emergency money, you should put your ‘extra’ retirement savings into investments of a longer time horizon. Here, you’re looking for equity growth – both to offset the effects of inflation and further capitalize on the eventual rebound of the economy and the stock market.

Be sure to diversify your retirement savings among a variety of equity portfolios. Although you may invest some in funds that cater to large capitalization stocks, you should try to include real estate investments, international stocks, emerging markets, and smaller U.S. stocks.

These investments will reside in your ‘taxable’ accounts since they come from investment earnings and not work earnings. And as equity-based investments, their annual earnings should be small, since you’re investing for ‘growth in principal’. They may not ‘move’ for a while, but remember, you’ve already proven you don’t need this money. 

Consider this money outside your normal portfolio arranged according to your risk profile and income requirements. This way you can afford to risk a small portion of retirement savings and wait sufficient time for it to bloom.

For the most conservative investors, consider index-linked CDs.  These are FDIC insured CDs that pay interest based on increases in the stock market.  If the market falls, you original principal is guaranteed.  If the market rises, your index-linked CD increases in value.  Similar to this alternative, are equity-indexed annuities.  The same principals hold.  If the market declines, the issuing insurance company guarantees your principal.  If the market advances, your annuity balance participates in the gain.  Consult a retirement advisor to learn about your options for saving in retirement.

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