2728: Does Your Retirement Need a Plan B? by Kathleen Coxwell of New Retirement on Reverse Mortgage

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[00:01:07] at evernorth.com slash wonder. This is Optimal Finance Daily, episode 2728. Does your retirement

[00:01:15] need a plan B? By Kathleen Coxwell of newretirement.com. And I'm your host and personal

[00:01:21] finance enthusiast, Diana Merriam. Now let's get to today's post as we optimize your life.

[00:01:31] Does your retirement need a plan B? By Kathleen Coxwell of newretirement.com.

[00:01:38] The stock market fluctuates, illnesses occur, and family emergencies happen. And people are

[00:01:43] living longer today than ever before, which only stokes concerns of being able to pay for retirement.

[00:01:50] Never mind that many of us simply have not saved enough. Our lack of a sufficient retirement plan

[00:01:55] practically screams, I need a plan B. Jeff Butcher, president of Citizen Advisory,

[00:02:02] a comprehensive retirement planning firm in Perrysburg, Ohio says, quote,

[00:02:07] a good retirement plan involves sufficient savings, strategies for spending, drawing from IRAs,

[00:02:14] taxation and health care. But there also needs to be a contingency plan,

[00:02:20] just in case the initial plan you set forth goes awry. End quote. The good news is that you may not

[00:02:27] even have to look far for your most valuable plan B. In fact, you may actually be living under its

[00:02:33] roof. It's your home. Using your home, home equity as a backup plan. For most baby boomers,

[00:02:41] home equity is their largest asset, making it a really good safety net for their retirement.

[00:02:47] Butcher suggests, quote, having a plan B is all about securing an income stream to sustain you

[00:02:53] in retirement. And while payments through Social Security, pensions or products like annuities

[00:02:59] can offer guaranteed protection, so can tapping home equity. The use of home equity is going to

[00:03:05] creep into financial plans more heavily in the future. It doesn't make sense to live in a house

[00:03:10] that's paid for only to be starving. End quote. There are several ways to tap into the value of

[00:03:17] your home, including home equity loans, home equity lines of credit, downsizing and reverse

[00:03:25] mortgages. Downsizing is often the most financially efficient way to tap into your home equity.

[00:03:31] However, if you want to stay in your home, a reverse mortgage can be a really good solution.

[00:03:37] Why reverse mortgages make a good plan B for retirement? Reverse mortgages are loans. You're

[00:03:44] borrowing your own home equity. However, unlike a home equity loan, there are no monthly payments.

[00:03:51] To be eligible, you have to be at least 62 years old and own your home outright or have a mortgage

[00:03:57] balance that can be paid down at closing. There are multiple ways to use a reverse mortgage as

[00:04:02] a backup plan. Here are three options. Number one, line of credit. If you truly just want a

[00:04:10] backup plan, then setting up a reverse mortgage as a line of credit can be very efficient.

[00:04:15] There are upfront fees, but you won't pay interest on the money in the line of credit,

[00:04:20] only on any money you withdraw. Reverse mortgage lines of credit have been gaining steam in

[00:04:26] retirement planning for the flexibility and peace of mind that they provide.

[00:04:30] Funds in the line of credit grow over time. So even if you don't need them now,

[00:04:35] you can tap into an amount that will be higher at a later time once you finally do need to access

[00:04:40] the funds. Unlike a traditional home equity line of credit or HELOC, which requires a monthly

[00:04:47] payback, a reverse mortgage line of credit allows you to draw on the credit line as needed without

[00:04:53] making a monthly payment. A HELOC can also be closed or reduced by the bank, whereas the reverse

[00:04:59] mortgage line of credit is guaranteed. This guarantee is a key feature that can also provide

[00:05:05] a lifeline against the unexpected. Butcher says, quote, it's a good thing to have that reverse

[00:05:11] mortgage line of credit open. It's there if you need it. And it makes a lot of sense to have that

[00:05:17] credit line open for emergencies as a plan B that's waiting in the wings, end quote. Note,

[00:05:24] perhaps the best time to set up a reverse mortgage line of credit is when housing prices are high

[00:05:30] and interest rates are low. Number two, set up monthly income payments. If you have sufficient

[00:05:37] home equity and you need additional retirement income, then a reverse mortgage can be set up

[00:05:42] to pay you monthly income for the rest of your life, no matter how long that might be.

[00:05:47] This makes reverse mortgages a really interesting backup plan if your primary concern is cash flow

[00:05:53] or adequate retirement income. And number three, pay off mortgage or get cash now.

[00:06:00] Perhaps you're in need of a plan B right now. Many people get a reverse mortgage to solve

[00:06:05] immediate financial problems. A reverse mortgage pays off any existing mortgage you might have,

[00:06:11] eliminating monthly mortgage payments and improving your household budget.

[00:06:16] A reverse mortgage also enables many borrowers to get immediate access to cash

[00:06:21] to be used however you want or need. Pros and cons of reverse mortgages.

[00:06:27] The most common reverse mortgages found on the market today are known as home equity conversion

[00:06:32] mortgages or HECMs, which are backed by the Federal Housing Administration. There are many advantages

[00:06:40] to an HECM reverse mortgage. Unlike a traditional forward mortgage, HECMs do not require borrowers

[00:06:48] to make monthly mortgage payments. Rather, in a reverse mortgage, you receive payment from the

[00:06:53] lender via your home equity. The loan proceeds are tax-free and there are no restrictions on

[00:06:59] how you may choose to spend the money. That means that you can use funds from a reverse mortgage

[00:07:04] to pay for medical expenses, home improvement projects, take a vacation, or however you like.

[00:07:11] You or your heirs will never owe more on the loan than the value of the home when the loan comes due.

[00:07:17] And you retain home ownership and get to keep living in your home. It's important to note that

[00:07:23] while you may not be making monthly payments with a reverse mortgage as you would with a traditional

[00:07:28] mortgage loan, you're still responsible for paying property taxes and insurance associated with your

[00:07:34] home. Disadvantages include possible reduction in the estate available to your heirs. Many retirees

[00:07:43] wish to pass on their homes to their heirs. You can do this with a reverse mortgage,

[00:07:47] but your heirs must pay off the loan and usually do this by selling the house. Heirs will never

[00:07:53] owe more than the value of the home, losses are covered by the federal government, and are allowed

[00:07:58] to keep any equity left in the home. And upfront insurance and fees can be higher than those paid

[00:08:05] on home equity loans. Is a reverse mortgage a good backup plan for you? If all of your net worth

[00:08:13] is tied up in your home, a reverse mortgage might be a good opportunity for you to be able to live

[00:08:17] the lifestyle you want to live in retirement, all while staying in your home, Butcher says.

[00:08:23] The amount of proceeds you may be eligible to receive from your reverse mortgage depends on

[00:08:28] your age, current interest rates, the value of your home, and your spouse's age, if applicable.

[00:08:34] Estimate your reverse mortgage loan amount today and start assessing your backup plan options.

[00:08:43] You just listened to the post titled, Does Your Retirement Need a Plan B?

[00:08:48] By Kathleen Coxwell of newretirement.com. And I'll be right back with my commentary.

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[00:10:39] slash OFD for your extended 30-day free trial. I think it's important to note that with a reverse

[00:10:47] mortgage, the amount the homeowner owes to the lender goes up, not down over time. This is

[00:10:53] because interest and fees are added to the loan balance each month. As your loan balance increases,

[00:10:59] your home equity decreases. A reverse mortgage loan is not free money. It's a loan where borrowed

[00:11:05] money plus interest plus fees each month equal a rising loan balance. The homeowners or their heirs

[00:11:12] will eventually have to pay back the loan, usually by selling the home. This is perhaps

[00:11:17] the greatest risk of a reverse mortgage. You cannot predict the future. Reverse mortgages

[00:11:23] come with stipulations about which circumstances require immediate repayment or foreclosure on the

[00:11:29] home. Some outline how many days or months the property can sit vacant before the lender can

[00:11:34] call the loan. For example, say you have a serious health scare and spend three months in the

[00:11:39] hospital. The lender may be able to call the loan and foreclose on the house because it's unoccupied.

[00:11:45] The same is true if you have to move into an assisted living facility. The house must be sold

[00:11:50] and the reverse mortgage must be repaid. Another consideration is risk to your spouse.

[00:11:56] Reverse mortgage contracts require immediate repayment on the death of the borrower.

[00:12:01] So if only one spouse's name is on the reverse mortgage contract and that person dies,

[00:12:06] the house can be sold out from under the surviving spouse. But that'll do it for today. Have a great

[00:12:12] day and start to your weekend. Thank you for listening and I'll be back here reading to you

[00:12:17] tomorrow where your optimal life awaits.