When you hear the word retirement, what do you picture? Is it time spent with family and friends, laying on a beach soaking up the sun, or perhaps a solo afternoon dedicated to your favorite hobby? Whatever your vision for retirement entails, it’s crucial to establish the foundations for a safe, financially stable, and healthy lifestyle in order to indulge in your passions during these golden years.
Historically, retirees have typically turned to three pillars of financial support after leaving the workforce: pensions, Social Security benefits, and personal savings. With pensions no longer commonplace, for many people, personal savings may be the most dependable and important of these funds during retirement. However, the Federal Reserve Survey of Consumer Finances estimates that households between the ages of 55 and 65 have a median savings balance of $185,000.1 Though this may appear to be a substantial figure at face value, and no single target number applies to everyone, this is only a fraction of the amount realistically required for retirement.2 Yikes!
Although underestimating the funds needed for retirement is a serious issue, another challenge you may face in retirement is the rising cost of living. Many Americans are now grappling with just how much they’ll need to have saved to weather the uncertainties of the future.
Reimaging Retirement
Fortunately, if you are looking for an additional source of retirement cash flow – there is a solution. Tapping into the wealth built up in your home with a Home Equity Conversion Mortgage (HECM), commonly referred to as a reverse mortgage, can allow you to increase your monthly cash flow and maximize your retirement savings. And you may be surprised to learn just how much equity you have accumulated in your home. Recent figures from the Federal Reserve show that members of the Baby Boomer generation account for a cumulative $19.03 trillion in real estate wealth, making up nearly half of all real estate wealth at over $45 trillion.3 That’s a lot of power in Baby Boomers’ homes!
What does retirement actually look like in today’s landscape? Well, according to a 2022 survey conducted by the National Poll on Aging, a stunning 88% of those aged 50 to 80 report the importance of aging in place.4 If this resonates with you, it’s important that your financial plans for retirement grant the freedom to nest where you already feel most comfortable: right at home.
Reverse Mortgages 101
So, how do reverse mortgages actually work? This loan, available to homeowners aged 62 and older, makes it possible for you to access a portion of the equity in your home without having to sell or make monthly mortgage payments. You are, of course, required to keep current with your property taxes, insurance, and home maintenance. Reverse mortgages are extremely versatile, so you can customize your loan in a way that best suits your unique goals and personal situation. One example of the flexibility of a reverse mortgage are the disbursement options for how you choose to receive income tax-free4 loan proceeds. These options include a line of credit, lump sum, term payments5 – or any combination of these methods.
And how you choose to use the money from a reverse mortgage is entirely up to you! Whether you’re interested in making home improvements and modifications, setting aside funds for healthcare expenses, or simply amping up your spending power, you can choose to leverage the funds however you see best fit for yourself – or others. Maybe you’d like to help your children or grandchildren with major expenses – you have the freedom to help loved ones, too!
These are just a few of the virtually endless ways you may choose to use cash flow from a reverse mortgage. With today’s retirement landscape proving especially challenging, there are plenty of strategic use cases for incorporating home equity in various areas of your retirement plans. Let’s consider some real-life strategic applications of reverse mortgages to address some of today’s common retirement challenges.
- Struggling to cover rising costs: Life can come at you quickly, and there are any number of reasons that expenses may become more difficult to cover in retirement. Whether due to reduced income in retirement, increased healthcare costs, unexpected emergencies, or any other hurdle, it’s possible that your need for funds increases. Creating a consistent stream of cash flow with a reverse mortgage can help you achieve greater financial security and peace of mind. It’s also possible that monthly loan disbursements can provide you with adequate funds to help you live more comfortably and, therefore, delay Social Security benefits in order to maximize your payouts down the line.6
- Accumulating hard-to-pay-off debt: High-interest debt, like credit cards, and making even just the minimum payments is a problem for many older adults. According to MarketWatch, nearly 65% of those aged 65 to 74 held debt in 2022, with the average amount coming in at $134,950.7 Devising a plan to tackle debt payments can be overwhelming, especially if you’re already finding it difficult to make ends meet in retirement. In working with a professional, you may opt to take advantage of a reverse mortgage loan with a lump sum disbursement. This large payout could go a long way in mitigating substantial payment balances and help you consolidate and manage debt once and for all.
- Covering “aging in place” costs: They say that “health is wealth” – and it’s no secret that maintaining a healthy lifestyle as we age is easier said than done. As we become more prone to certain diseases or at risk for age-related conditions, the costs of covering the care we need may increase as well. And for those wishing to age in place, it may be necessary to make necessary home modifications or pay for in-home care services. A reverse mortgage with a line of credit is a strategic way to manage these costs. By establishing a line of credit early in retirement, you could grow your funds over time, giving you an additional resource to help face costs as they arise in the future.8
- Pressure to liquidate assets during a market downturn: Surprises can come at any turn, and this is especially true when it comes to the economy. Even the most prepared planners cannot control exactly how and when the market changes over time. And when this inevitably happens, it has the potential to pose a major threat to financial plans. If you find yourself at risk for financial losses during a poor economic period, leveraging funds from a reverse mortgage can help prevent you from having to sell important assets or smart investments. Preserving your investment portfolio as you age is important, and drawing funds from a reverse mortgage line of credit, instead of draining your assets, can help protect you in the moment and preserve your portfolio for future generations. When you partner with your trusted financial professional, this strategy can give you the freedom to make financial decisions from a healthy place and not under pressure.
- Financing the perfect forever home: For many Americans, retirement marks an important milestone and offers a “next chapter” for how – and where – you envision spending your years post-workforce. Whether you want to move closer to family, relocate to a warmer climate, or simply “right size” to a home that better suits aging needs, a reverse mortgage could provide the financial means to make these dreams a reality. A “Reverse for Purchase” gives you the power to accomplish two goals in a single transaction – buying a new home while securing a reverse mortgage – with no required monthly mortgage payments.9 Many retirees like this option because it could help them save money by reducing closing costs since a single loan is taken out. This can also make the home-buying process faster and easier – a win-win!
- Strained resources resulting from a divorce: Divorce can be difficult to navigate at any stage of life, but navigating one later in life can be particularly challenging. Older couples typically have shared retirement savings, pensions, Social Security benefits, and a family home to consider – on top of the understandably challenging emotions that come with divorce. Dividing these assets can be complex and can leave individuals with payments that feel more burdensome when covered by one person. When utilized strategically, a reverse mortgage can provide relief to both partners during a divorce. Depending on the decided arrangements, one spouse could use a Reverse for Purchase to buy their own home and use funds to pay off the other’s portion of the home, help fund alimony, or increase cash flow to cover costs for one or both parties. The flexibility offered by the loan is a massive benefit for those hoping to achieve a positive and sustainable outcome for both spouses.
Putting it All Together
As you can see, reverse mortgages could be a transformative financial tool in retirement – with limitless strategic use cases. But just like all financial decisions, the decision to get a reverse mortgage is a big one. And the best place to start is with a solid understanding of the loan, so you can determine if/how it can be best suited for your individual situation.
It’s always a good idea to speak with a professional who can walk you through the reverse mortgage process in its entirety. At Longbridge Financial, our reverse mortgage consultants get to know you and your goals so they can provide you with the education and information you need to make the best decision for your future. If you’re interested in learning more about how you can harness the Power of Home®️ to live the life you imagine, contact the Longbridge team today!
