Divorce is an often painful, difficult process no matter when it’s decided on as a solution, but the difficulty and complexity of the process can increase significantly for those at or near retirement. If a senior is facing the prospect of a divorce and can consequently run into issues related to cash flow, a reverse mortgage is one possible avenue that a recently-divorced person can take to maintain said cash flow.
This is according to Michelle Buonincontri, a financial analyst specifically focused on divorce in a new column published by The Street.
“If reducing expenses and saving can improve the odds for retirement success, then not carrying a mortgage into retirement could help after a divorce when income sources are limited and healthcare costs are most likely higher,” Buonincontri writes. “A reverse mortgage can be used as a strategy in gray divorce to assist in retirement planning.”
Financial resources are often specifically allocated to different members of the divorcing couple for a variety of reasons, and the changes in tax filing status that come with divorce can have an impact on what obligations get financial attention. This is especially disruptive if both spouses were working, and each member of the divorcing couple will now have less income as a result of their separation.
“Cash flow is usually a concern during and after divorce, as the resources earmarked to support one household are now supporting two, and filing single on taxes could reduce net income available for living expenses,” Buonincontri says.
This is where a reverse mortgage – specifically a Home Equity Conversion Mortgage (HECM) loan sponsored by the Federal Housing Administration (FHA) – may be able to play a role, she says.
“A HECM reverse mortgage should be evaluated as a possible tool or option, for those homeowners over age 62 (who have little-to-no mortgage obligation), as it can be used to generate cash to bridge a shortfall in a spending plan, allow the delay of claiming Social Security, or help facilitate the purchase of a new home for one or both spouses,” she writes.
Other benefits a reverse mortgage can help provide include strategic use to avoid losses to an investment portfolio, or weighing this option versus some of the specifics of other, more common home equity tapping methods, she says.
“A reverse mortgage can even protect against sequence risk and declines in your portfolio (if you are drawing from here, you don’t need to sell in a down market to raise cash), has benefits over HELOC, or could be used as part of long-term care (LTC) planning to stretch retirement assets,” Buonincontri writes.
Other options that seniors in divorce can explore include the flexibility of an annuity, appropriately managing expectations based on the changes in circumstances, and to go through a logical process in determining how assets will be split up between members of a couple.
Read the article at The Street.