Reverse Mortgaging part of your Financial Plan?

[Scanner]

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?

[autoxer]

Nope.

Not if you can help it.

If you don't want to give it to the kids, then donate it to charity.

[Scanner]

I just figure that most people, at the beginning of retirement may have something like this:

$350,000 house
$500,000 401K
$250,000 Roth IRA

(let's say this is average - I don't know - all I do know is that home ownership is where the majority of American's wealth is)

You are then asking to take a huge chunk of asset off the table.

Obviously, you want to chew the cash first but I don't know. . .there may be an advantage to leaving some liquid assets untouched and just becoming re-leveraged.

Kinda like businesses that always float debt. . .it's only when the business if finally sold (in this case both spouses dying) is the debt finally retired.

It was just a thought or a different angle on things. . .may need extra life ins. to satisfy the lien upon death. . .I guess "Dying Broke" isn't exactly the most popular strategy around here. . .

[disneysteve]

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

No. I do not count the value of our home in my retirement planning. I don't want to have to sell it or mortgage it in order to make ends meet.

all I do know is that home ownership is where the majority of American's wealth is

Well, I guess I'm in the minority. I'm 42 and the majority of our wealth is not in our home. Our investment portfolio is already worth considerably more than our home and the portfolio is growing far faster than the home's value.

[Scanner]

Well, I understand the aversion and beleive me, I'm not a reverse mortgage commercial.

But I see no reason to not consider it in your portfolio, especially if you draw down on your house starting age 80 to 100 years old.

Yeah, I know we should all have 2.5 million dollars to carry us through all the Princess Cruises and Early Bird Buffets of retirement but let's face it, an average couple isn't going to make it there, maybe only make it halfway.

I know of one old lady who sold her house and decided to live in hotels and cruise ships (cheap $100 cabins) for her retirement. It was handicapped accessible and she had ship doctors at her disposal. All of her worldly possessions were in 3 suitcases. Other than rental tax of the hotel (about 9%), she escaped property tax in retirement.

That's my kind of retirement.

Whittle away my assets until I'm broke.

At my eulogy, they'll all say, "Here lies Scanner. . .he died broke."

[scfr]

Nope, no plans to use a reverse mortgage ever.

But, Scanner, you do raise what I think is a very important question (one I've raised here before): How much of one's net worth should be in their primary residence? I'm shooting for no more than 15% at retirement, and no more than 25% when I buy my next house (with about 20 years until retirement).

[disneysteve]

Yeah, I know we should all have 2.5 million dollars to carry us through all the Princess Cruises and Early Bird Buffets of retirement but let's face it, an average couple isn't going to make it there, maybe only make it halfway.

I realize I'm not the "typical" person due to my income, but I'd say my parents were more typical. My dad was a self-employed accountant. Mom was a SAHM, a housewife as they were called then. I don't think my dad ever earned more than about 30K. He died in 1992. My mom is now 76 and living very nicely on the nest egg they built while my father was alive. She sold their home a few months ago after moving into a senior apartment complex last June. The home value was not her biggest asset. Her savings/investments were well more than double the home value. She didn't move because she needed the money. She moved because the house was too big for her and the neighborhood was failing. She has all the money she needs and more to last her the rest of her life. And that came from a one-income couple of fairly average means. There is no reason why others can't do the same today if they choose to.

By the way, it is a Holland America cruise on my retirement list, not Princess.

[Scanner]

But, Scanner, you do raise what I think is a very important question (one I've raised here before): How much of one's net worth should be in their primary residence? I'm shooting for no more than 15% at retirement, and no more than 25% when I buy my next house (with about 20 years until retirement).

SCFR,

Yes, that's another reason I brought it up - we have all seen real estate really skyrocket the last 3 years. . .it will come down and go up again.

It kind of begs the question - is this where Generation X, Generation Y, and Generation Next's wealth is going to be?

Let's say the average home in 30 years is now $500,000. Well, that's a lot. . .I know there's inflation, a 1/2 million won't be worth as much, but that may be asking the average retiree a lot to not have that on the table at retirement. But considering everybody starts out with $0.00 (theorectically), that's a lot.

Right now, listing all of our assets (excluding cars/furniture) and minusing the liability (we have about 64% equity in our house), our house is 53% of our wealth. I'm sure that will change with compounding and I have often said, "I don't know how I ended up here" but it makes me think about the next big run-up in real estate and where it will put us.

[disneysteve]

Right now, listing all of our assets (excluding cars/furniture) and minusing the liability (we have about 64% equity in our house), our house is 53% of our wealth.

So your home is currently your largest asset, but barely. It probably won't be long before the rest of your portfolio is worth more than your home.

Currently, our equity is about 35% of assets. By the time we retire in 20 years, it will be a far smaller percentage.

[poundwise]

A reverse mortgage is, in essence, a piecemeal method of borrowing against the equity in your home. With a reverse mortgage, you will do this with substandard rates and high fees.

If I, in retirement, ever thought I might need such a thing, I'd probably prefer to sell the house and move into something less costly, taking the equity out for myself without accepting the necessity of steadily losing money in the process and strapping the family I leave behind with the burden of paying the note to keep the house or selling the house to pay the note.

Also consider the potential mess that could be created if you have to leave the home (perhaps for an assisted living or nursing home environment) but you are unable to make the payments which would then be required.

Most arguments about reverse mortgages come down to a statement that indicates a lot of negatives about them but then, frequently, is summed up by saying, "But for some people..."

In my view, a reverse mortgage is something "some people" might utilize, but it is never a very good thing.

The "some people" it would make sense for are those who have a paid-for house, or one with substantial equity, who have not otherwise prepared well for retirement and thus have few options.

It certainly is not part of a well thought-out retirement plan IMO.

[lgslgs]

Have you pulled up a reverse mortgage calculator on the web and run a few scenarios?

I have, and there's no way I'd plan on one of those as part of my long term financial strategy.

I think a lot of folks hear about them and view them as their financial Prince Charming who's going to come right all of their financial wrongs in their old age. Those folks are headed for a rude awakening.

Lynda

[LivingAlmostLarge]

I don't want to reverse mortgage my home, but I can understad how a lot of people who poorly planned retirement will be forced to.

[Scanner]

It certainly is not part of a well thought-out retirement plan IMO

Well, there's issue I was trying to bring up.

I don't know much about reverse mortgages but maybe in certain circumstances, it makes better sense to take out a home equity loan, deploy it into income producing vehicles (bonds, muni's, utility stocks) and award yourself a monthly payment on top of the loan payment. . .not sure.

Yes, strapping your heirs with loan payments on real estate in probate would not be helpful so I'm sure some estate planning advice would be needed.

Let's say somehow you end up like this at age 75:

$500,000 house
$200,000 Roth IRA
SSI monthly payment

Maybe taking out a $400,000K home equity loan and then investing it conservatively and giving yourself $1000/month could make a difference.

I don't know. . .now we are getting into numbers and OhioJim is much better than me.

Anyway, yes. . .having cold, hard cash and lots of it in retirement should be the goal, not just "equity." I acknowledge that.

I guess I am trying to stimulate discussion for the vast majority of Americans who will end up in the middle ground between 3.5 million dollars in liquid assets on one end and penniless and insane on the other end, which this forum does tend to polarize what happens to Americans.

Because things happen in life. Maybe an emergency happens where you have to tap your retirement early (bail out a failed business venture, bail a kid out jail, health problem not covered by insurance, whatever).

As Forrest Gump said, "It happens."

I know we all think we are somehow going to be in that top 1%. Kinda like Let's Make a Deal. The contestants can't possibly fathom that the breifcase they are holding has $5.00 in it. It's got to hold the million.

Well. . .I guess I'm getting preachy. . .sorry.

[disneysteve]

maybe in certain circumstances, it makes better sense to take out a home equity loan, deploy it into income producing vehicles (bonds, muni's, utility stocks) and award yourself a monthly payment on top of the loan payment.

Maybe taking out a $400,000K home equity loan and then investing it conservatively and giving yourself $1000/month could make a difference.

1. You probably wouldn't qualify for a home equity loan if you have limited income in retirement as you wouldn't be earning enough to make the payments.

2. Investing the proceeds of a HEL probably wouldn't be worthwhile as you couldn't earn enough to come out ahead. HEL rates are up around 7% or a little more. No safe investment is going to pay you enough to outperform the interest on the loan..

[Scanner]

DisneySteve,

I know you are not going to come ahead. Remember, I am exploring the possibility of dying broke here. It still would free up some cash in your retirement.

Maybe a better solution is to sell the house with a 5 year lease to an investor with a 5 year option to renew.

You 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).

Still, it could be a win/win situation.

Oh, well. . .probably a lot of thinking for nothing.

It would probably be better to downsize but it's not always practical.