“Financial planners, advisors, CPA’s, estate planners, and other finance professionals are realizing that obtaining a Reverse Mortgage EARLY opens up potential income later in retirement. The basic premise is that the growing line of credit (LOC) is not taxed on its growth, and is a secure collection of funds that can act as a second source of retirement reserves when needed.”
– Understanding Reverse
By now, everyone knows that homeowners, age 62 and older, can access home equity at low interest rates through the government insured reverse mortgage program. Most don’t realize, however, that a dire need for cash shouldn’t be the primary purpose of the home equity conversion.
When you hear that wealthy doctors, lawyers, and even executives in the mortgage industry are getting reverse mortgages for themselves and their family members, you can be pretty sure they aren’t trying to prevent foreclosure. They choose the reverse mortgage because there are inherent advantages for retirement planning. Unfortunately, most finance professionals don’t understand how working with a reverse mortgage professional can help their clients achieve greater financial stability during their retirement years.
Research in the Journal of Financial Planning suggests that financial planners should recommend reverse mortgages for many clients, including ones who do not have an immediate need for them. Why? In part, because many baby boomer homeowners have disproportionate amounts of their retirement savings held in real estate. 10,000 boomers are turning 62 every day, and unlike the generation before them, their retirement savings are in their homes, not in defined benefit plans like pensions. Drawing part of their monthly retirement income, tax-free, from their home equity nest eggs will help their other, more traditional, retirement funds last much longer.
LOC Growth – The basis of reverse mortgage financial planning
The primary financial planning advantage is the line-of-credit (LOC). The LOC experiences compounded growth, and many homeowners will opt-in to reverse mortgages as early as possible (age 62), and wait to draw their increased funds until later as a form of tax-free retirement income. Homeowners only accrue interest on the amounts they borrow. So, this option allows them to have emergency funds that grow (again tax-free) at current interest rates. The funds are then easily converted to monthly income when traditional retirement savings are depleted. The following highlights some features of the LOC:
- The LOC grows tax-free at current rates
- The LOC can be converted to cash at any time
- The LOC draws are not considered income, and therefore are tax free
- The LOC is secure, as it is not frozen or reduced if property values drop
- The LOC can be an effective emergency fund
- The LOC can be used as a form of insurance
- The LOC diversifies your home equity investment
- The LOC increases when making prepayments
The increased use of reverse mortgages for financial planning purposes is further explained by looking at the other traditional income sources during retirement. Social Security is not sufficient to provide the income necessary to sustain an individual during retirement years. Employers have moved away from defined-benefit pension plans, and instead have opted for employer-sponsored tax-advantaged accounts. Traditional retirement savings are subject to volatile market conditions, and employment during the retirement years is often not practical, or even possible.
Indeed, financial planners, advisors, CPA’s, estate planners, and other finance professionals are now realizing that obtaining a reverse mortgage EARLY, with a line of credit option, opens up potential income later in retirement.
For more information on the strategic uses for reverse mortgages, please subscribe to this blog and purchase my book, Understanding Reverse.