You do not lose your home to the government. You remain one hundred percent owner of your home. When you die, your children still get all of the equity in your home.
And it is not expensive.
In recent years, the government has made reverse mortgage loans very user-friendly and affordable. Now called a Home Equity Conversion Mortgage (HECM), it is a great tool to satisfy all the objectives we have covered.
A reverse mortgage will:
- Secure your home
- Allow you to maintain your financial self-sufficiency and your pre-retirement standard of living
- Enable you to pass on wealth to your family
- Make it possible to create a rainy day fund
Theory Behind The Solution
As a financial problem solver, I begin with the end in mind. What is the end goal?At the end of the process, will we end up where we want to be?
By design, retirement meets our financial needs and objectives by depleting the funds we have saved just for this season of life. I know it runs counter to the notion of always having abundant savings at hand, but think about it. We saved through all our employment years for retirement so that we can now deplete what we have saved. And, to complicate things, we hope to not outlive our retirement funds. After saving for so long, it is not easy to change our mindset from “saving” to “depleting,” but that is exactly the way retirement works.
Fundamentally, our retirement goal is very simple. At retirement, we want to begin using our savings to live on, while at the same time securing our home, ensuring that our income does not run out, remaining in control of our finances, enjoying life, and hopefully having something to leave our family.
That’s exactly what a reverse mortgage loan does. It secures your home while allowing you to use the equity to increase your spendable income.
Let me try to explain how this works and how easy it really is. I tell my clients to think of their assets and income as “buckets.” Each bucket is filled with money. I love the mental picture of these buckets because I can visualize a full bucket of money, a depleting bucket of money, and an empty bucket.
In my explanations, I narrow it down to three basic assets buckets: a saving bucket, a Social Security/pension bucket, and a home equity bucket. Although many retirees have several types of investments and sources of possible retirement income, I keep it as simple as possible since these are the three categories most assets fall under.
Retirement savings are your 401(k), your IRA, and other types of savings that are drawn on once retired. These funds are, for the most part, liquid. This means they can be converted into cash quickly with minimal impact to the value.
Each month you deduct steady income from these savings accounts. The negative aspect of drawing funds from qualified retirement savings, except for a ROTH IRA, is that these funds are taxable when you draw from them as income, reducing your spendable income. And furthermore, when you draw on the funds, the balance is being depleted. If you have other sources to draw from, it is my suggestion to withdraw as little as possible out of your savings account. Why? Keeping a higher balance will allow compound interest to work and build up the balance. If you keep depleting your savings, it can result in the retiree’s biggest retirement fear—once your savings are gone, they’re gone. My solution will reveal other sources so you can maintain your savings.
Pension or Social Security income
Your pension and Social Security income are fairly straightforward. They are regular payments made during a person’s retirement from their past employer or from Social Security. Once you start collecting, you get the same amount every month for life.
Equity is the difference between your home value and the amount you owe on the home. Equity continues to grow, or appreciate, regardless of how much is owed on the property. The concept of growth regardless of equity is one of the most valuable aspects of real property. The negative side of equity is that it is not liquid by nature. Equity is an asset that remains in your home. It’s locked, and you cannot use the equity without converting it to cash. You can convert it to cash by selling the home and paying off any loans, or you can convert it to cash by getting a new conventional home loan with a cash-out refinance or a home equity line. The problem with refinancing or getting a home equity line is you’re getting a bigger loan, and the higher loan will cause your payment to go up. And if you sell your home, you create another problem—finding a new place to live and paying all the extra costs of moving.
Three Asset Sources But Only Two Income Sources
While there are three assets sources—savings, Social Security, and home equity—only two of them, savings and monthly Social Security, will provide you with spendable income that you can draw from. You do not have access to your home equity without selling your home or refinancing it.