HOW TO TRADE-UP (OR DOWN) USING A REVERSE MORTGAGE

Houses on stacks of coins and calculator on dollar bills

Home prices in many markets have gone up recently.  This is leaving many retirees with sticker shock when it comes to trading up, or even trading down.

Consider Anna and Olaf who are in the process of selling their $400,000 home.  They’ll be left with net proceeds of approx. $364,000 after paying 9% in sales expenses (transfer taxes, real estate commissions, etc.).  The new house they want to purchase costs $500,000, leaving them $136,000 short.

  • Option 1: sell or liquidate $136,000 worth of investments or retirement assets. They will need to “gross up” the withdrawal for taxes if the funds are in a taxable account such as a conventional 401(k).  Assuming a 25% tax bracket, they will actually need to withdraw $181,333 from the account, pay their 25% income taxes, and walk away with net proceeds of $136,000.  Ouch!
  • Option 2: use a $136,000 Home Equity Conversion Mortgage (HECM), also known as a “reverse mortgage”. In this case, there would be no monthly mortgage payment.  Anna and Olaf could preserve their retirement assets and buy their new home without any impact on their cash flow.

Please contact me for more information or if you’d like for me to run the numbers for your situation.

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Baby Boomers Are On the Move

Baby Boomers Are On the Move | My KCM

According to a Merrill Lynch study“an estimated 4.2 million retirees moved into a new home last year alone.” Two-thirds of retirees say that they are likely to move at least once during retirement.

As one participant in the study stated:

“In retirement, you have the chance to live anywhere you want. Or you can just stay where you are. There hasn’t been another time in life when we’ve had that kind of freedom.”

The top reason to relocate cited was “wanting to be closer to family” at 29%, a close second was “wanting to reduce home expenses”at 26%.

A recent Freddie Mac study found similar results, as “nearly 20 percent of Boomers said they would move closer to their grandchildren/children compared to 13 percent who said they would move to a warmer climate.”

Not Every Baby Boomer Downsizes

There is a common misconception that as retirees find themselves with fewer children at home, they will instantly desire a smaller home to maintain. While that may be the case for half of those surveyed, the study found that three in ten decide to actually upsize to a larger home.

Some choose to buy a home in a desirable destination with extra space for large family vacations, reunions, extended visits, or to allow other family members to move in with them. According to Merrill Lynch:

“Retirees often find their homes become places for family to come together and reconnect, particularly during holidays or summer vacations.”

Bottom Line

If your housing needs have changed, or are about to change, let’s get together to discuss your next steps.

Retirement Resources

Although most retirees expressed the desire to age in place, less than half had really considered any strategies to leverage their home equity as a retirement income source. Since most retirees were not set on leaving the home to their heirs, they may be open to the possibilities of using home equity as a retirement income tool to support the goal of aging in place. However, only 49 percent of the respondents had a comprehensive written retirement plan in place and many of the respondents who had financial advisors, 40 percent, did not have a comprehensive written retirement plan. A good comprehensive retirement income plan should take into account where the retiree wants to live in retirement and should also discuss home equity as either an income or legacy tool, depending on the individual client’s goals, desires, and needs. Doing some homework on the potential advantages of using home equity in retirement would benefit retirees and their advisors, especially if aging in place is the desired outcome.

Source: Net Worth Data from U.S. Census Bureau, Survey of Income and Program Participation, 2008 Panel, Wave 10; Present value of Social Security benefits based on a worker with $60,000 of wages, and a same aged nonworking spouse. The worker's PIA is estimated at $1,557 (calculated using the Social Security Quick Calculator). Benefits are claimed at 66 and the worker dies at 84 and the spouse at 89. Present value was based on a 0% real rate of return (a current approximation of the risk free rate of return)

Retirement Timing

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A lot of discussion about “sequencing of distributions” has been taking place recently in financial planning circles.  “Sequencing of Distributions” looks at the order in which you take distributions from your retirement account.  This matters because the order in which you take distributions has a very significant impact on how long your retirement assets will last.

Consider the two examples illustrated in the chart.  Column 1 has the same amount of distributions scheduled for the next five years, regardless of how the market performs.  Column 2 changes the amount of distributions in years 2, 3 and 4, based on the performance of the market.

A reverse mortgage line of credit can be used to supplement your income in the years where you take a reduced distribution from your retirement account.  This could preserve your assets for a longer period of time, and give you more flexibility as the market fluctuates.

Please see a financial advisor for more details on how to evaluate a better distribution sequencing strategy for your situation.  Please contact me for more details on how a reverse mortgage could help.