When discussing Social Security and Reverse Mortgages, most professionals have always responded that “distributions from a reverse mortgage do not adversely affect basic Social Security benefits.” That is true, as basic Social Security is not a “means tested’ program. But that is only half of the story. The Reverse Mortgage can actually be used to ENHANCE a homeowner’s Social Security benefits.

Social Security strategies are critical to retirement planning

Let’s back up, and discuss the current reliance on Social Security. According to the Social Security Administration:

• 51% of the workforce has no private pension coverage, and
• 34% of the workforce has no savings set aside specifically for retirement.

As a result, over 64% of aged beneficiaries currently receive at least half of their retirement income from Social Security.

Over 50 years ago, Congress changed Social Security to allow Americans to claim benefits at age 62. And almost ¾ of the American population will draw Social Security at that age. At that time, however, the benefits are reduced. Currently, age 70 is the age at which retirees can maximize their monthly benefits.

Many retirees SHOULD delay Social Security, but don’t

Of course results may vary based on earnings history and cost of living increases, but Social Security benefits will generally increase 8% (of full retirement benefit) for each year that is delayed until age 70. The end result is higher monthly payouts at age 70.

Some seniors will continue to work during some, or all, of the years leading up to age 70. According to Falling Short: The Coming Retirement Crisis, “Individuals who delay receiving Social Security benefits from 62 to 70 increase their monthly benefits by a full 76%.”

However, according to Social Security expert, Cindy Lundquist, the 76% estimate may be a little misleading. That figure assumes that the individual continues to work beyond age 62. She states “If you are not working from 62 until age 70, the increase in benefits may be closer to 54% to 57%.”

So, how many people actually take advantage of this opportunity to delay until age 70? According to data from the Social Security Administration only 1.1% of men and 1.7% of women wait.

Most people do not know how long they will live. Baby Boomers, however, have longer expected life spans than the generation before them. This makes Social Security delays especially attractive. However, if a retiree is in poor health and anticipates a shorter lifespan, this may not be the right strategy. For them, it may make sense to opt in early.

The problem has always been that retirees are counting on that income at the moment they retire. They don’t want to wait. That is precisely why many in their 60’s are turning to the Reverse Mortgage to fill the gap in their retirement income during that time.

But what about all the money they won’t get from 62 to 70?

Social Security is not about accumulation, but rather sustainability. Opting in too early could cause poverty if you live longer. If you opt in too late, you simply risk not receiving your Social Security benefits if you die. As Jack Guttentag (aka The Mortgage Professor) so eloquently states,

“Avoiding poverty risk is more important than avoiding mortality risk. If I don’t avoid poverty risk, I may be forced to endure poverty in my old age. If I don’t avoid mortality risk, in contrast, I won’t be around to lament the money I didn’t draw.”

In a nutshell, retirees can defer Social Security benefits and supplement their retirement income with tax-free draws from a Reverse Mortgage if needed. The objective is to get to age 70 comfortably, at which point monthly Social Security benefits are maximized.

For more information on the strategic uses for Reverse Mortgages, please subscribe to this blog and purchase my updated book, Understanding Reverse.

Dan Hultquist

This is not intended to be legal, tax, or financial planning advice, and Reverse Mortgage professionals (myself included) are not social security experts. For a recommendation on the use of home equity during retirement, please consult a Financial Advisor who understands the strategies for home equity conversion and retirement cash flow.