Worried you’re going
to run out of cash in retirement? The solution to your problem may be closer
than you think.
After Joyce Ruvolo's husband passed away two
years ago, she noticed a disturbing trend. "I found myself taking money
out of the bank every month to pay the bills," says the 77-year resident
of Boca Raton, Florida.
Unhappy with her cash flow situation, Ruvolo
found a solution to her problem with Kathy Burns, a reverse mortgage loan
specialist with On Q Financial. Burns helped set up a reverse mortgage, also
known as a home equity conversion loan, which allowed Ruvolo to tap into the
equity in her house and receive regular payments to supplement her
income. "Kathy was wonderful, and the e
extra money I have in my
pocket at the end of the month makes up the deficit I had before," she
says.
Ruvolo's situation isn't unique, and finance
experts say the biggest asset many seniors have is their home. By leveraging
its value, those who are facing the prospect of afinancially
rocky retirement may find they can live comfortably instead.
Using a house as a
retirement fund. With traditional
pensions disappearing and Social Security payments remaining
relatively flat thanks to the current low-interest economic environment, some
say home equity is the logical place to look for money in retirement.
"Where have they saved most of the money in their life?" says Jamie
Hopkins, an associate professor of taxation at American College and co-director
of the New York Life Center for Retirement Income. "It's in their home."
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To tap into the value of their house, seniors
could use one of the following products or strategies:
- Reverse
mortgage
- Home
equity line of credit
- Downsizing
- Home-sharing
Of these, reverse mortgages may be garnering
the most attention. These loans allow seniors age 62 or older to receive
payments based upon the value of their home and their age. Once the borrower
passes away or moves out of the house, the loan must be repaid, typically
within a year. To do so, the house may be sold or the loan refinanced in a
conventional mortgage.
Not your 1980s reverse
mortgages. While seniors like Ruvolo have warmed to reverse mortgages,
others may be reluctant to sign up for a product that, in decades past, gained
a reputation for saddling people with expensive loans that were inappropriate
for their circumstances. However, Hopkins says that has changed. "It's not
the reverse mortgage that existed in the 1980s."
Reza Jahangiri, CEO of reverse mortgage lender
American Advisors Group, says today's loans come with consumer protections,
such as financial counseling and a financial assessment, which weren't a part
of older loans. What's more, these are non-recourse loans which means no one
will end up paying more than a property's value. "If the loan amount is
greater than the home value, the heirs aren't responsible [for the
difference]," Jahangiri says.
Interest rates may be higher for reverse
mortgages than for other mortgage products, and the loans may
not make sense for seniors who expect to sell or move within the next few
years. However, for those with small retirement funds and limited options, a
reverse mortgage may make sense. "We have a mushrooming demographic of
seniors, life expectancy is up and the savings picture is not robust,"
Jahangiri says. "It's become a reality that the reverse mortgage has
become part of retirement planning."
Keep communication open
with family members. Since a reverse mortgage could require the sale of a family
home, seniors should keep their adult children aware of their plans.
"It's very important they discuss it with their family," Ruvolo says.
While children can't prevent a senior from taking out a reverse mortgage,
keeping everyone informed avoids unpleasant surprises during a time of grief.
If family members don't want to lose the home,
there is always an option to do a private reverse mortgage. These loans need to
be professionally set up to avoid gift taxes, but they allow an adult child or
other family member to make payments to a senior in exchange for equity and
eventual ownership of the property. "The caveat is it's not common for
kids to be in a position to advance hundreds of thousands to their parents,"
Jahangiri says.
For those who decide not to take out a reverse
mortgage, taking out a home equity line of credit, selling a home or downsizing to a
smaller residence are all ways to find the cash needed to boost
meager retirement funds. "Figure out what you want in retirement,"
Hopkins says. "Once you figure out your goals, you can use [your house] to
help you meet them."
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