Very often, the answer to this kind of retirement dilemma is to reduce expenses. Based on my calculations, if this couple could reduce their monthly spending by $1,000 and earn an average 5% on their assets, they would not have to sell their home, and they would reach age 97 with assets of $200,000. That is certainly a better outcome, but it does not allow a lot of room for error — or a long term medical problem.
“I can’t afford to retire!” That’s the fear expressed by many of my new clients. In fact, it’s often the reason that my clients come to me in the first place.
While I can’t wave a magic wand to create the necessary retirement savings, I can help you to stretch the savings you already have.
Let me give you an example. A husband and wife would like to retire in the next five years. They have equity in their home, though not as much as they once had. Two years ago, it was appraised at $800,000; it’s probably worth about $600,000 now, with a mortgage debt of $225,000. They also have around $150,000 in investments. Their joint income is about $135,000. They pay a monthly mortgage of $1,350, have income tax deductions of almost $1,000 monthly, and spend another $4,400 monthly.If you think they have the makings of a secure retirement, think again. Even if they both work until 70 to collect their maximum social security payments, at their current spending level, they will run out of investments to sell at age 80. That means they’ll have to sell their home, whether they want to or not. And, if not, well — the couple was right. They really can’t afford to retire.
Sound depressing? Keep reading this story. It has a happy ending!
The solution in this case was a reverse mortgage. What is a reverse mortgage? It’s a loan, secured by a home, that is not paid off until the owners die, sell the home, or vacate the home for 12 months. There are no monthly loan payments. If the loan exceeds the value of the home, that’s the reverse-mortgage company’s problem. The home must be the principal residence, and either the husband or wife must be at least age 62.
If they sold their home and used a reverse mortgage to purchase a smaller home for $350,000, they would still have almost $1.0 million in investments if they were to live to be age 97.
I checked with local reverse mortgage broker, Mary Jo Lafaye, to see what her experience has been lately. She indicated that “In the last few years I have seen the average age of my clients drop significantly. What used to be the ‘last ditch’ effort to stay in the home is, for many of my clients, a tool to boost their retirement portfolio income.”
Not many of my clients will be able to expect $950,000 at age 97. Thirty years is a long time away, and it’s hard to know what average investment returns will look like tomorrow, let alone thirty years down the road. Still, what is clear is that using a reverse mortgage to buy a smaller home allows you to not deplete your investment accounts and use the equity in your home instead.
If you’re uncertain as to how well you are funded for retirement, and especially if you’re concerned about the question, an independent, hourly financial planner can help answer your questions, provide you with strategies and come up with effective solutions. A plan for your retirement is only a phone call away.