Age 62 is a good time to take stock of where you are
financially, and where you are going. You become eligible
for social security at 62, though it may or may not be to
your advantage to begin drawing it then. You are just a few
years away from being eligible for Medicare. If you own your
own home, furthermore, you become eligible for a HECM
reverse mortgage at 62.
In counseling seniors who are involved in this process, I
often encounter novel situations that force me to think
about issues that I never thought about before. One such
issue arose today in connection with a senior seeking my
counsel on his retirement game plan. The issue was whether
the expected life of a retiree affects a retirement plan.
The retiree who consulted me is now 61, spouse is 62, and he
is planning to purchase a home in a warmer state. He has
liquid assets about equal to the price of the home he is
planning to buy, he plans to draw social security at 62, and
has two small pensions, one terminating in 10 years, the
other in 20 years.
A reverse mortgage was not part of his plan, he had given it
no thought. My view is that any homeowner whose retirement
is not 100% secure could profit from a HECM reverse
mortgage. While no two retirement plans are exactly alike,
the HECM is extremely flexible and can be adapted to a wide
variety of financial needs. Hence, I explained to the
retiree the various ways in which a HECM reverse mortgage
might strengthen his plan.
Minimize Cash Outlay on Home
Purchase: He could use the
HECM to finance the home purchase, minimizing his cash
drain. But his liquid assets generate very little income,
which means that liquidating them to purchase the house
would be more cost effective than taking a mortgage of any
type. Further, when a HECM is used to minimize the cash
drain on a house purchase, no borrowing power remains in
later years for any other use. I recommended against this
use of a HECM.
Permanent Income Supplement:
He could use the HECM to draw a fixed monthly payment for as
long as he lived in the house. I recommended against this
use of a HECM as well because his income needs are not
uniform over time. He may want more income in the first 8-9
years of his retirement so that he can defer taking social
security, or his need might peak in 10 or 20 years when
other income sources go away.
Temporary Income Supplement:
He could use the HECM to
supplement his income for the period until he hits 70,
allowing him to defer social security payments until then,
at which point the payment amount would be substantially
larger. I recommended this use of the HECM. If the temporary
income supplement needed by the senior does not exhaust his
HECM borrowing power, the HECM would be available for other
purposes later on.
Reserve Against Future Income
Decline: Because his
pensions terminate after 10 years in one case, and after 20
years in the other case, the borrower risks a significant
decline in income at those times. A HECM used to offset such
declines in income would be taken as a credit line that is
allowed to grow unused until it is needed. The line will
grow at a rate equal to the mortgage rate plus the mortgage
insurance premium rate. I also recommended this use of the
HECM. Whether the HECM could provide both a temporary income
supplement and a reserve against future income declines
depends on how much is needed for each use.
In response to my recommendations, the senior gave me
another piece of relevant information. He said that no one
in his or his wife’s family have lived to be very old.
“Rarely does anyone in the family get to 78”, he said. How
should that affect the retirement plan?
For one thing, it upended the decision on when to take
social security. If someone of 61 does not expect to live to
78, they should take social security at 62 because the
higher payment at age 70 would not last long enough to
offset the years of zero payments. Hence, I retracted my
recommendation for using a HECM to provide a temporary
income supplement, since the purpose of the supplement was
to enable the senior to delay taking social security.
A short life expectancy also means that the senior will probably die before his pensions terminate, which would mean that a reserve against future income declines consisting of an unused HECM credit line probably would never be used. That is not a reason to avoid a HECM-based reserve, however, because the reserve might be needed, even though the probability is low. No retiree wants to live with even a small risk that they can become impoverished by living too long. The HECM credit line reserve is insurance against that risk. The cost, if the line is not used, is the small HECM loan balance which would be deducted from the house sale proceeds that accrue to the borrower’s estate.