Kiplinger: Reverse Mortgages Help Close the Retirement Income Gap

Social Security is one of the most valuable assets that can produce a vital income stream for retirees later in life. But while deferring Social Security can yield higher funds at a later age, for some retirees looking to fill the gap between their working years and benefits access date, they might want to consider a reverse mortgage, according to a recent Kiplinger article.

“There’s a new world order when it comes to claiming Social Security benefits,” writes Rachel L. Sheedy from Kiplinger’s Retirement Report for February 2016. “In late 2015, Congress axed two popular strategies that helped couples maximize benefits. But all’s not lost. It’s just time to turn to Plan B.”

While some couples may be able to use the “file and suspend” and “restricted application” strategies—which enable the higher earner to postpone benefits and earn “lucrative delayed credits”—others may not be eligible. 

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Typically, those age 61 or younger as of January 2, 2016 are not eligible for either of these strategies, forcing them to look at other methods of leveraging Social Security benefits to maximize cash flow. 

For people who would still like to delay Social Security benefits but need to look at other ways to fill that income gap, Kiplinger suggests working longer, tapping retirement accounts early, and even the prospect of getting a reverse mortgage.

“Also think about tapping your home equity with a reverse mortgage line of credit,” Kiplinger writes. “Any remaining unused balance in the line of credit will grow at the same rate as the interest rate on the loan.”

Read more at Kiplinger.

Written by Jason Oliva

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  • Unfortunately, reverse mortgages cannot fill any income gap. They are debt. Borrowers do not obtain income from debt. Since over 98% of reverse mortgages today are allegedly HECMs (the only type FHA insures), the remainder of this comment is limited to HECMs.

    Adjustable rate HECMs with a large amount available in the line of credit can very easily fill a cash inflow gap for a number of years for most retirees. The cost is debt including interest (which compounds if unpaid), MIP (FHA monthly insurance cost which is compounded if unpaid). Do not mistake FHA proceeds for income. Income does not have to be repaid; HECMs are no different than any other nonrecourse debt to the extent that when the entire balance becomes due and payable, they must be repaid up to the related collateral.

    As to the use of HECMs to defer the date when Social Security benefits begin so that they will be larger, one must understand that using any debt not only increases the cost of mortality risk but also extends the theoretical pay back period. The most likely individuals to benefit from this strategy are married couples where at least one of the spouses has a projected life expectancy generally of 88 and older.

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