Financial Planner: Reverse Mortgages Can Offer Path to Retirement ‘Paycheck’

Managing finances in retirement can be difficult for a senior, most especially if someone is already strapped for cash. That makes the possibility of regular cash flow in addition to pre-existing benefit programs very attractive, and reverse mortgages can offer some seniors a viable path toward just such a path.

This is according to a new article appearing at NerdWallet written by Certified Financial Planner and author Liz Weston.

“Your expenses don’t end when your paychecks do, but creating a reliable income stream in retirement can be tricky,” Weston writes. “The right choices can result in sustainable income for the rest of your life. The wrong choices could leave you uncomfortably short of cash.”


While the first and most prominent recommendation revolves around maximizing Social Security benefits by deferring payments until age 70, finding other sources of guaranteed income can also help achieve a senior’s retirement financing goals.

“Ideally, fixed expenses in retirement would be covered by guaranteed income, such as Social Security and pensions, so that your basic lifestyle isn’t jeopardized by stock market fluctuations,” Weston writes.

Citing finance researcher Dr. Wade Pfau, two paths that could help create more guaranteed income could be an income annuity or a reverse mortgage.

“Another option could be a reverse mortgage, a loan that can convert some of your home equity into a stream of monthly checks,” she writes. “If you have a lot of equity but still have a mortgage, a reverse mortgage could pay off your loan and eliminate those monthly payments.”

Other tips to help retirees stabilize their finances in their post-working years include leaning on traditions like the “4% rule,” which financial advisors often suggest and which involves withdrawing 4% of your portfolio in the first year, before adjusting the amount for inflation each following year. Historically, this strategy has lowered the risk of depleting finances, Weston writes.

“Some planners, however, worry that 4% may be too high given current low interest rates and high stock valuations,” she adds. “The ‘Spend Safely in Retirement’ method, which [Stanford researcher Steve] Vernon created with the help of the Society of Actuaries, recommends using annual withdrawal rates based on the IRS’ required minimum distribution rules.”

Still, creating a “retirement paycheck” is often only a first step to preparing for finances in retirement. For instance, emergency funds for unexpected expenses will still need to be allocated, and retirees are also encouraged to make plans for other necessities like long-term care in the future, Weston says.

Read the article at NerdWallet.

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  • Liz has several misconceptions about reverse mortgages. It is anything but an annuity. When a senior receives an annuity payment, nothing happens other than the market value of the annuity as an asset is generally reduced but by less than the distribution payout. As to taxes, only a small percentage is subject to income tax since at the current annuity interest rates, so little is income and most is a return of the buyer’s capital.

    With a HECM, there is no interest income to recognize. The proceeds are generally not taxable when received; yet a portion of the proceeds could increase a borrower’s taxable income at termination if the Unpaid Principal Balance due is greater than the value of the home especially if a higher value home is involved in a proprietary reverse mortgage and the balance due is not paid in full.

    Yet a HECM or any other reverse mortgage payout creates a liability for repayment which an annuity distribution does not. The amount due on a reverse mortgage increases by accrued interest yet there is no comparable increased liability with an annuity.

    Much different than an annuity, a borrower must live in the home for a specified period time each calendar year. If the covenants of a reverse mortgage are violated and not cured, payouts cease. There is no such problem with an annuity and the owner is free to live anywhere he/she wants.

    The financial planning community has been learning that cookie cutter planning can be disastrous for clients. The 4% rule works in some situations but not in others. Also not all retirees want to take distributions who size makes them uncomfortable even though all the financial planning indications is that they could easily afford more than a 4% annual distribution. In fact for those who own their own businesses and the business contributes to a defined benefit retirement plan in their behalf, their distributions could easily exceed 4% annually.

    Liz seems to be an accomplished financial planner but that does not mean she understands reverse mortgages even though she seems to religiously follow the ideas of Dr. Pfau.

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