In a recent post, I addressed the common perception that a reverse mortgage is only for broke and desperate people. I’ve talked with many seniors over the years who were embarrassed about looking into a reverse mortgage. Some went to almost comical lengths to explain that they weren’t desperate and broke and didn’t really need it. They were just looking into it because they were “curious”.
Amusingly, some even tried to convince me they were calling on behalf of a “friend” when they were really looking into it for themselves. It reminded me of the old IHOP commercials where embarrassed customers disguised themselves when ordering the “Rooty Tooty” breakfast. Feel free to check out the video here:
Unfortunately, many seniors still find reverse mortgages to be embarrassing. Despite decades of education and increased awareness, many seniors who could benefit from a reverse mortgage avoid one because of this broke-and-desperate stigma.
As I explained in my previous article, I strongly disagree with the notion that reverse mortgages are only for broke and desperate people. First of all, you have to qualify for a reverse mortgage. If you’re truly broke and desperate, you probably don’t meet today’s qualifying guidelines. The financial assessment guidelines implemented in 2014 are designed to filter out applicants with poor qualifications.
A reverse mortgage is best used not as a bail out, but as a safety net. It is best used by seniors who are at least reasonably financially stable to provide added protection against the numerous unexpected expenses that can strike during retirement.
Home equity as a safety net
According to US census data, the typical American’s net worth at age 65 is $194,226. About 25% of that number is composed of assets like savings, retirement accounts, etc. The other 75% is home equity.
Now, think about your home’s equity for a minute. How does it make your life better? Whether it’s $500 or $500,000, what impact does it have on your day-to-day lifestyle? Probably not much, right?
If you’re not planning to sell your home, your home equity is just a number on paper. It might sound like a very nice number, but it has no real impact on your life. Unless you can convert your home equity into cash, you can’t use it to buy groceries or plane tickets to Hawaii, right? You also can’t use it to cover medical bills or home repairs.
In the past, you only had two options to convert home equity into cash: 1) sell the home (which means you have to move), or 2) get a cash out mortgage or HELOC (which means you’re stuck with a mortgage payment for the next few decades).
The reverse mortgage offers a third and better option. It enables you to convert home equity into cash without a mortgage payment and without giving up ownership of the home. As long as at least one borrower or non-borrowing spouse is living in the home and paying the required property charges, no mortgage payments are required.
You always retain title ownership of the home and can leave it to your heirs. Your heirs will inherit any equity remaining in the home.
The reverse mortgage is a non-recourse loan. If the home isn’t worth enough to settle the entire balance, FHA will cover the shortage.
Because the HECM enables you to convert home equity into usable cash, it can serve as an additional resource to protect against life’s “what ifs”. No longer do you have to rely on just your existing income, savings, and retirement accounts to pay for unexpected expenses. Home equity can be part of the picture as well.
The HECM reverse mortgage can also get rid of existing payments for mortgages, credit cards, or other loans. This frees up cash so you can build up savings and more easily absorb unexpected expenses with your existing income.
Life’s financial curve balls
We all know that life has a way of throwing financial curve balls at us. A few weeks ago, I woke up to a flat tire that couldn’t be repaired and ended up spending $400 on two new tires. A little over a year ago, I underwent outpatient surgery for an injury and had to spend thousands for tests, copays, and deductibles.
When you’re retired and on a fixed income, your capacity to increase your income is limited or nonexistent. Large unexpected expenses can be devastating if your budget is tight and/or you have little savings.
Today’s retirees are living a lot longer than in the past. If you’re retired for a decade or two – which is not unusual – it’s a good bet you’ll be hit with at least a few of the following big ticket unexpected expenses.
Home maintenance and repairs
According to the Social Security Administration, the average 65-year old man today will live to age 84. The average 65-year old woman will live to age 86.5. If you retire at 65, it’s a good bet you’ll have to replace at least one more roof, one more air-conditioner or heat pump, and a few more water heaters, appliances, etc. What other home repairs or maintenance will you have to pay for? What will inflation do to the cost of repairs and maintenance over 10 or 20 years?
Unfortunately, medical insurance isn’t what it used to be. Unless you have VA benefits, Tricare, or unusually good medical benefits, you need to plan for future medical costs.
Even if you’re on Medicare and have a great supplemental policy, you can still get hit with out-of-pocket costs that can add up fast. It’s not unusual for seniors to incur large out of pocket costs for copays and specialized treatments and prescriptions. Medicare doesn’t cover dental care or hearing aids, which can cost thousands.
I once worked with a client who specifically sought a reverse mortgage to cover future long-term care expenses. This is a good strategy because it’s been said that the last six months of your life will likely be the most expensive. In-home or nursing home care can cost $5,000 to $15,000 per month in today’s dollars. Such costs can wipe out a good-sized retirement nest egg in a very short period of time. I once worked with a gentleman who drained a $400,000 retirement account on medical costs for his critically-ill wife.
We all know the cost of everything goes up over time due to inflation. Life is not as cheap as it used to be years ago because our dollars don’t go as far as they used to. You might have noticed in the video that a Rooty Tooty breakfast back in the early 1990s was only $3.99. It costs about triple that amount today.
If you retire at age 65, you could be retired for another 20 years. You may be financially comfortable today, but what will the cost of living be in 20 years? I’ve talked with many seniors over the years who have felt the pinch of inflation. They were very comfortable when they first retired, but inflation has since eroded their purchasing power and now they’re barely getting by.
Sequence risk (or sequence of returns risk) can be a huge retirement account killer. If you’re reliant on income from IRAs, 401(k)s, etc., and the stock market declines early in retirement, you could be forced to sell shares into a a declining market. This increases the risk you’ll drain your retirement assets much faster than planned.
You can’t eliminate sequence risk altogether, but you can reduce it. The best way to do that is by having other financial resources – including home equity. Instead of selling shares in a down market, you can leave your retirement assets untouched and instead live on home equity until the market recovers. The helps protect and preserve your retirement assets and lifestyle for longer.
For a more detailed explanation and analysis of how a reverse mortgage can reduce sequence risk, check out my article here.
Will your assets last as long as you do?
Today’s retirees are living longer than ever. It’s not unusual for retirees to live 20 years after they retire. A lot can change in that time! The cost of living will increase, you’ll incur home repairs, your health will decline, and you’ll probably see at least another complete stock market cycle. Your income and assets need to weather all of these risks if you want to be financially secure.
Home equity needs to be a part of the retirement planning picture. Home equity is that great untapped savings “account” built up over many years of maintaining your home and paying mortgage payments, property taxes, and homeowners insurance. A reverse mortgage can help you tap into that investment so you can better absorb unexpected expenses.
Let me be clear: a reverse mortgage is not for broke and desperate people. Seniors don’t need to be embarrassed by the reverse mortgage anymore. A reverse mortgage is not the perfect solution for everybody, but it’s a fantastic option for many. If a reverse mortgage can help you live more financially secure in retirement then, by all means, proudly take advantage of one.