What are my Retirement Income Options?

“Whether households have sufficient savings from which to ensure adequate income throughout retirement is a concern of households and, therefore, policymakers. Although most households are eligible to receive Social Security benefits in retirement, over the past 30 years, the types of non-Social Security sources of retirement income have been changing.”        – John J. Topoleski, Analyst in Income Security, Congressional Research Service – July 23, 2013

Retirees are worried about it. Children of retirees are worried about it. Financial Planners are worried about it. Heck, CONGRESS is worried about it! Will we have income during our retirement to last through unexpected circumstances and increased longevity?

It might help to know what options are available. Most people are familiar these five traditional methods of providing for monthly expenses during retirement:

  • Social Security Income (and sometimes Supplemental Security Income)
  • Pension Income
  • Retirement Savings Plans
  • Medicare (and sometimes Medicaid)
  • Part-time Employment

Each these five methods, however, have issues that explain why baby boomers look for other options. Social Security is not sufficient to provide the income necessary to sustain an individual during their 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.

AA032297However, baby boomers have a disproportionate amount of their retirement savings in their homes. For most homeowners, in fact, the principal residence is the largest asset they possess. Therefore, draws from home equity during retirement have become more prevalent.

How does someone crack the home equity nest egg?

The equity that is created by home ownership is something of value that can be accessed for additional income during retirement. The home can indeed be used as a retirement nest egg, but it is difficult to crack for various reasons. Ken Scholen, whose research helped create the home equity conversion mortgage, wrote on this topic back in 1995:

“Some people have used their homes as retirement nest eggs. But to do so, they have to do things that most of us would rather not do – sell our homes and move elsewhere, or take out a loan against our homes and start making monthly payments.”

– Your New Retirement Nest Egg

His writing was an inspiration to me as I wrote my book, because his message is more applicable now than ever. Baby boomers do NOT want to leave their homes in order to access the equity they have built. Ken went on to say:

“For most of us, home equity is not a source of retirement income at all. We spend decades building up equity in our homes. But we never cash in on our most important investment. We never get to use the equity we’ve worked so hard for.”

We know that Reverse Mortgages were established to solve this problem. We can convert home equity into a line-of-credit or monthly cash payments. This can supplement other forms of retirement income. While it may be beneficial to wait and opt-in to Social Security later, the same is not true for Home Equity Conversion. It actually makes sense to obtain one early in retirement, make payments to reduce the loan balance, and watch the line-of-credit grow as another form of future retirement income.

– Dan Hultquist

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