Reverse Mortgaging part of your Financial Plan?

[jIM_Ohio]

Do any of you factor in tapping the equity in your paid house as part of retirement?

Should you?

Obviously, the downside is your estate is left with a lien on it but why should the kids get everything?

NO- I do not even consider a reverse Mortgage when choosing retirement, looking at income etc...

I would buy an annuity before I did a reverse Mortgage.

I do think about living expenses... and from that standpoint I have considered

a) paying off current mortgage
b) buying a smaller condo in preferred location
c) buying a second condo in another location with the profits [a)-b)]
d) selling c) when the second location is no longer in the picture.
e) investing proceeds from d), probably into an annuity

[disneysteve]

immediately get $500,000 in your pocket, which could then be deployed into conservative vehicles (muni bonds, bonds, utilities, CD's), which would offset the lease payment somewhat (no, you aren't coming out ahead, LOL).

No, it still wouldn't work. First, you couldn't borrow $500,000 if your only income was SS because you would never qualify for the loan. Even if you did somehow qualify, let's say the loan was at 7.25%. What would you do with that money? You could buy a CD for under 6%, but you would be losing money in the process. Where could you safely invest the money and not only earn enough to make the loan payments, but also pay the taxes on the investment earnings AND still make a profit beyond that. If you know of any investments that would accomplish that, please let me know as I'd invest in them today.

ETA: This refers to a home equity loan, which is what you mentioned. A reverse mortgage is a whole different thing. Yes, you could take out a reverse mortgage and get some immediate income, and for many who arrive at retirement house poor, that may be their only option, but it isn't a good one.

[Scanner]

DisneySteve,

No, it still wouldn't work. First, you couldn't borrow $500,000 if your only income was SS because you would never qualify for the loan.

No, you misunderstand - you sell your house for $500,000 with a contigency that you get to lease it for $X/month for 5 years. You now have $500,000 in your pocket at settlement.

An investor now gets to build equity.

You could buy a CD for under 6%, but you would be losing money in the process.

Sure, let's say you lease the house for $1500/month but only are able to get $1400/month in investment payout without touching prinicipal.

A $100/month loss.

However, would this not be theorectically better than drawing down your savings at 4%/year when you could leave your liquid assets at least in an 20% stock/80% bond mix?

Why do you theorectically have to wait for your heirs to "liquidate?" Is it just the psychological need to "own" a house?

I don't know. . .I know I am weird. . .I hate owning things.

Where could you safely invest the money and not only earn enough to make the loan payments, but also pay the taxes on the investment earnings AND still make a profit beyond that. If you know of any investments that would accomplish that, please let me know as I'd invest in them today.

No, again, I reintereate. . .you aren't coming out ahead. Taken out to 100 years old, you die broke.

Don't do this if you plan to take your money with you.

[autoxer]

Remember, I am exploring the possibility of dying broke here.

So when you are broke, you'll start writing your own eulogy? That sounds like a stressful retirement...

[Scanner]

JimOhio,

I must admit I don't understand annuities - I wouldn't mind a small tutorial/explanation on what they are.

I will say something though - I understand commodity markets, fairly certain of stock equities, I understand mutual funds but there are two things in this world I don't understand:

1. What the hell happened with Nixon and the Watergate scandal.

2. Annuities

[Scanner]

So when you are broke, you'll start writing your own eulogy? That sounds like a stressful retirement...

No. . . I am just saying at my eulogy, I hope the person doesn't note that my life was all about wealth accumulation.

[disneysteve]

As Stephen Wright said, "I know when I'm going to die because my birth certificate has an expiration date."

Stephen Wright aside, the problem with planning to die broke is you don't know when you are going to die. What happens if you run out of money and you're still alive. That would suck, wouldn't it.

That is the appeal, to some, of reverse mortgages and other annuity products. You can't outlive your money. Of course, you can get hammered by inflation and lose lots of buying power, but you'd always have some money.

[humandraydel]

I understand commodity markets, fairly certain of stock equities, I understand mutual funds but there are two things in this world I don't understand:

1. What the hell happened with Nixon and the Watergate scandal.

2. Annuities

1. Some people broke into the Democratic National Party office or some such and stole documents or something in the run-up to the election. It was later found out that Nixon ordered (or at least knew of and/or encouraged) the break in. ....at least, that's what I think happened.

2. An annuity is a financial "product" offered by insurance companies. In some way, it could even be considered a "form of insurance." What happens is you "buy" an annuity for a certain dollar amount. In return for your lump sum payment to the insurance company you will get a payment every year until you die. The insurance company will do some fancy calculation to determine how much they'll pay you each year, based mainly on your age (and of course the dollar amount you give them).

So basically it works like this (and these numbers are completely made up!): You "buy" a $500,000 annuity. You give the $500,000 to the insurance company. Based on your hypothetical age of 60 they calculate that each year they will give you 5% of your annuity purchase price. So they will give you $25,000 per year every year until you die. You live a long time, you win. You die shortly after buying the annuity, they win. Really, it's a way to manage risk, on both your and the insurance company's part. In some situations it's suggested that you buy an annuity with maybe 30% of your total portfolio.

Also, note that this is really the same thing a pension plan does. Based on the age you retire, they determine what % of your total pension value they can give you. If you retire at 55, they give you less because they expect to have to "pay out" a lot longer. If you retire at 65, they give you more.

[jIM_Ohio]

2. An annuity is a financial "product" offered by insurance companies. In some way, it could even be considered a "form of insurance." What happens is you "buy" an annuity for a certain dollar amount. In return for your lump sum payment to the insurance company you will get a payment every year until you die. The insurance company will do some fancy calculation to determine how much they'll pay you each year, based mainly on your age (and of course the dollar amount you give them).

So basically it works like this (and these numbers are completely made up!): You "buy" a $500,000 annuity. You give the $500,000 to the insurance company. Based on your hypothetical age of 60 they calculate that each year they will give you 5% of your annuity purchase price. So they will give you $25,000 per year every year until you die. You live a long time, you win. You die shortly after buying the annuity, they win. Really, it's a way to manage risk, on both your and the insurance company's part. In some situations it's suggested that you buy an annuity with maybe 30% of your total portfolio.

Also, note that this is really the same thing a pension plan does. Based on the age you retire, they determine what % of your total pension value they can give you. If you retire at 55, they give you less because they expect to have to "pay out" a lot longer. If you retire at 65, they give you more.

I'll add to this. Social Security is an annuity. In some ways the interest from bonds behave similar to an annuity. In the case of Social security, there are eligibility and tax issues, in the case of interest from bonds there are clearly interest rate risks and inflation risks.

If you are looking for "multiple" retirement income legs:

1) SS
2) 401k
3) Roth
4) Cash accounts/ taxable accounts

You could add a 5th leg (annuity). Depending on what you pay for, you could have the annuity indexed for inflation, or just regular cash. One advantage of using an annuity is that 2), 3) and 4) could be invested more aggressively because you have the guaranteed income from 1) and 5).

Annuities come in many shapes and sizes. Not all shapes and sizes are for everyone. I am referring to an immediate annuity (pay $$ today, start getting payments tommorrow). These are generally cheaper.

There are Variable annuities which many suggest to stay away from. The VA has "sub accounts" which can be invested in mutual funds. These mutual funds can then "increase" in value... then at some point you "annuitize" the VA (this is a technical term describing you now want fixed payments from the variable annuity).

I am less familiar with VAs, and not even that familiar with regular annuities. For 200k, I could probably "buy" an annuity today which would "appear" to return around 6-7%. More than the 5% cash accounts yield and less than the overall return of the market.

The bet with that 6-7% return is
a) the insurance company can invest to generate that return
b) the insurance company makes out if I buy annuity today and die tommorrow.

I see it as a way to reduce risk and add an income leg to my retirement.

[disneysteve]

Another variation is the charitable gift annuity. Rather than buying your annuity from an insurance company and having them keep the money when you die, you instead donate money to the charity of your choice. They then pay you monthly payments for the rest of your life. When you die, the charity gets the principal. That way, if you die early on, at least the money goes to support a cause you care about, rather than just going to an insurance company.

[Scanner]

Ah, I think I understand (not the Nixon Watergate scandal but annuities).

It's kind of like a form of "hedging" that you do with commodities.

Say you own a trucking co. and you worry fuel is going to go up - well, you buy oil futures, a small $$$ amount and you get the power of leverage. If it doesn't go up, well, you lose a little money. . .if it does, you make money to cover fuel costs, maybe even a profit because you are so leveraged.

The only thing I don't understand is you don't seem to get any form of leveraging from an annuity like you would if you hedged with commodities.

I can understand death being a catastrophic event and getting insurance for that. . .but living. . .I'm not sure that qualifies as a catastrophic event.

In the end, I understand it better but I am not sure why anyone would buy an annuity. Seems like a poor hedge.

As far as Nixon/Watergate, I still think it had something to do that the lie was worse than the crime. . .I don't know what was going through my parent's heads at the time and I'm sure my son will ask me about Monica Lewinisky someday.

[jIM_Ohio]

Ah, I think I understand (not the Nixon Watergate scandal but annuities).

It's kind of like a form of "hedging" that you do with commodities.

I can understand death being a catastrophic event and getting insurance for that. . .but living. . .I'm not sure that qualifies as a catastrophic event.

In the end, I understand it better but I am not sure why anyone buy an annuity. Seems like a poor hedge.

There is a risk a person will outlive their assets. Annuities hedge that risk.

[Scanner]

To stay in line with the discussion. . .in the end, I think I'd rather liquidate my assets at 75. . . than buy annuities and other "overfancy" stuff.

[jIM_Ohio]

I see my retirement income coming from 4 sources:

1) SS which is mildy indexed to inflation. Goal is for this to be less than 25% of my income

2) Dividends in taxable accounts. Dividends tend to keep pace with inflation, the goal is at least 25% of income to come from dividends.

3) drawing down retirement accounts. I'd like this to be 25% of my income.

4) an annuity. This will be 25% of my income stream.

The end result is 50% of income is guaranteed for life, regardless how long I live. I can invest 2) and 3) aggressively with 50% of assets in bond like assets guaranteeing me income every year.

[Scanner]

You know. . .if it's one thing I've learned about investing, invest in what you understand.

I understand stocks, mutual funds, and commodities pretty well (or as well as I think I have to humanly understand).

I still don't understand why anyone would buy an annuity. Really, you could sit there and explain me to Watergate and Annuities over and over and over again and I'd still get to the end and say,

"Why should I buy one of these?"

Really, if everyone here at savingadvice.com wants to pay me $500,000. . .yeah, sure, I'll send you all a check for $2000/month the rest of your life.

Heh, heh.

Or should I say:

Moo woo hoo ha ha ha ha ha haaaaaaaaaaaaa

This seems like some kind of pyramid scheme to me that Met Life and the other players are running on the American public

No wonder our pension system is in trouble. The pyramid is collapsing.