2732: [Part 2] Running Low in Retirement - Income Strategies by Darrow Kirkpatrick of Can I Retire Yet

[00:00:00] Looking to part ways with complicated, expensive, and uncertain shipping?

[00:00:04] Then give your business the edge it needs with USPS Ground Advantage Shipping from the United

[00:00:10] States Postal Service. Keep everything simple with clear, upfront pricing and no unexpected

[00:00:17] surcharges. Keep things affordable with some of the lowest prices out there. And keep it all

[00:00:23] reliable with on-time ground shipments. It's time to turn shipping to your advantage.

[00:00:28] Learn how at usps.com slash advantage. USPS Ground Advantage. Simple, affordable, reliable.

[00:00:58] Optimal Finance Daily Episode 2732 Running Low in Retirement, Income Strategies,

[00:01:17] Part 2 by Darrell Kirkpatrick of caniretireyet.com. And I'm your host and personal finance enthusiast,

[00:01:24] Diana Merriam. Now let's pick up where we left off yesterday and continue optimizing your life.

[00:01:34] Running Low in Retirement, Income Strategies, Part 2 by Darrell Kirkpatrick of caniretireyet.com.

[00:01:43] A reverse mortgage lets you generate income from your home equity, guaranteed for life as long as

[00:01:49] you stay in your home. You or your heirs may not own your home in the end, but you'll never owe

[00:01:55] more on the loan than the value of your home. Government insurance protects you if the bank

[00:02:00] has problems producing income, and it protects the bank if you should consume all of your equity

[00:02:06] before dying. From your perspective, the advantage is clear. Using only your home without requiring

[00:02:12] any additional assets, you now have access to an income stream that will last as long as you do.

[00:02:18] Though recent reforms have reduced the costs and risks, reverse mortgages are far from a perfect

[00:02:25] solution. In my opinion, they should be considered a last resort. In the right circumstances,

[00:02:32] they are a legitimate choice, but they remain complex and expensive. They are sometimes sold

[00:02:39] aggressively in inappropriate situations. Used recklessly, they could result in losing your home.

[00:02:46] Why? Because you still must have cash flow to pay for taxes, insurance, and maintenance,

[00:02:52] or risk default. Given the expense and downside, the government requires financial counseling

[00:02:59] before you can take on a reverse mortgage. The biggest downside to a reverse mortgage in my

[00:03:05] mind is the expense. The transaction costs are similar to buying a home. At settlement,

[00:03:12] there will be an origination fee, shop around for the best deal, only the maximum is set by

[00:03:18] the government, an upfront mortgage insurance premium, generally 0.5% of the appraised value,

[00:03:26] and other typical real estate closing costs. Then for the life of the loan, the lender will

[00:03:31] draw down your home equity to pay its interest charge based on the market rate, an FHA insurance

[00:03:38] premium of 1.25%, and possibly a servicing charge. Those long-term charges will substantially erode

[00:03:47] your wealth, though the effects may be hidden by the regular income you receive. In my example

[00:03:53] calculations, about 5 to 7% of the available home equity disappears into fees at the start of the

[00:04:00] reverse mortgage. Then there are the monthly charges compounding for the life of the loan

[00:04:05] after that. If there is a cheaper way you can generate retirement income than a reverse mortgage,

[00:04:11] you should choose it instead. My figures show a reverse mortgage generates about a 3%

[00:04:17] draw against your total home equity for life, not adjusted for inflation. Compared to getting zero,

[00:04:24] that's pretty good, but compared to annuitizing or probable stock market returns, it's nothing

[00:04:31] special. The second biggest downside to a reverse mortgage is the complexity. The more complicated

[00:04:38] a financial instrument, the harder it is to determine the risk and reward. You may have

[00:04:44] to rely heavily on mortgage professionals to understand and compare offerings. Two online

[00:04:50] calculators that I found useful in this process were from the Mortgage Professor and the National

[00:04:56] Reverse Mortgage Lenders Association, or NRMLA. Despite the drawbacks, reverse mortgages will

[00:05:04] likely be the best retirement income solution for baby boomers who are house poor, stuck in

[00:05:10] large homes with inadequate cash flow. Downsizing would often be preferable, but reverse mortgages

[00:05:17] are another option. Scott Burns writes, quote, used for long-term planning rather than emergencies,

[00:05:25] reverse mortgages are likely to become a major tool for the millions of Americans

[00:05:30] who have a lot more equity in their homes than in their retirement savings, end quote.

[00:05:35] Example, how do these income-based strategies work in practice? For a typical retired couple,

[00:05:43] what is the potential financial benefit of annuitizing and taking out a reverse mortgage?

[00:05:49] To answer these questions, let's analyze a typical scenario. Assume a couple, both age 65,

[00:05:55] that is concerned about their ability to meet retirement expenses going forward.

[00:06:00] They have $500,000 in total saved investment assets and they own their $250,000 home free

[00:06:08] and clear. For an initial retirement income strategy, they could try systematic withdrawals

[00:06:14] from their investments using a safe withdrawal rate expected to preserve their assets over a

[00:06:20] 30-year retirement. What is that safe withdrawal rate these days? Well, it's probably less than the

[00:06:27] historical 4%. In fact, Wade Fowle recently argued that it's more like 2%. But for our example,

[00:06:35] let's give systematic withdrawals the benefit of the doubt using a slightly more optimistic

[00:06:40] 3% safe withdrawal rate. At a 3% safe withdrawal rate, this couple's $500,000 in investments can

[00:06:48] safely generate about $1,205 a month in inflation-adjusted retirement income.

[00:06:55] Coupled with Social Security, that might be enough, but it could be very tight depending on their

[00:07:01] lifestyle. What if they want to live less frugally and are willing to give up some control of their

[00:07:06] principal? Well, as I write this, ImmediateAnnuities.com will let them buy an annuity with those

[00:07:12] investment assets that generates about $2,400 a month. And the NRMLA reverse mortgage calculator

[00:07:21] shows that they could take out a reverse mortgage on their home to generate about another $700 a

[00:07:27] month for life. That's a total of about $3,100 a month in guaranteed retirement income.

[00:07:33] So by annuitizing plus using a reverse mortgage, this couple can nearly triple their available

[00:07:40] monthly retirement income versus what can be achieved using a safe withdrawal rate from their

[00:07:45] investments alone. By virtue of having some assets, investments and a home, and choosing to

[00:07:51] give up some control over their principal, they can significantly boost their retirement income.

[00:07:57] Though the final amount is not inflation-adjusted, it's likely to exceed what they could safely draw

[00:08:03] from their investments for decades to come. Staying afloat. So that's it. This article and

[00:08:11] the last have provided the ingredients for a backup plan on both the expense and income sides

[00:08:16] of retirement. The strategies I've discussed give you leverage to preserve a comfortable lifestyle

[00:08:22] without charity from the outside, even in some of the worst case financial scenarios.

[00:08:27] The essential strategy for increasing retirement income is this. You give away some or all of your

[00:08:34] principal in exchange for better cash flow. That also means that you lose some flexibility

[00:08:40] for handling emergency expenses, gifting or inheritance. But in return, you get the

[00:08:45] peace of mind of guaranteed income for life. Running low in retirement would be a nightmare,

[00:08:52] but there are solutions to keep you safe. If you are in this particular boat, you may have

[00:08:58] to give up pride of ownership in the vessel, but at least you can keep it afloat for the duration

[00:09:03] of the voyage. You just listened to part two of the post titled Running Low in Retirement

[00:09:13] Income Strategies by Darrow Kirkpatrick of caniretireyet.com. And I'll be right back with

[00:09:19] my commentary. Looking to part ways with complicated, expensive and uncertain shipping?

[00:09:25] Then give your business the edge it needs with USPS Ground Advantage shipping from the United

[00:09:31] States Postal Service. Keep everything simple with clear upfront pricing and no unexpected

[00:09:38] surcharges. Keep things affordable with some of the lowest prices out there and keep it all reliable

[00:09:45] with on-time ground shipments. It's time to turn shipping to your advantage. Learn how at

[00:09:51] USPS.com slash advantage USPS Ground Advantage, simple, affordable, reliable. For a lot of people,

[00:10:01] it can be stressful and confusing to manage their finances. Even I used to feel this way when using

[00:10:07] different finance apps. But then I tried Monarch Money and everything got so much easier. Maybe

[00:10:12] you're saving for a down payment, a wedding, a dream vacation, your kid's college. I found that

[00:10:18] Monarch makes it so easy to help you reach your financial goals, whatever they are. I definitely

[00:10:23] wouldn't be able to allocate my finances or plan as clearly without help from Monarch. In fact,

[00:10:29] Monarch is the top rated all-in-one personal finance app. It gives you a comprehensive view

[00:10:34] of all of your accounts, investments, transactions and more. Create custom budgets, set goals and

[00:10:41] collaborate with your partner. And now get an extended 30-day free trial when you go to

[00:10:46] monarchmoney.com slash OFD. After trying out Monarch for myself, I understand why it's the

[00:10:52] top rated personal finance app. And right now get an extended 30-day free trial when you go to

[00:10:58] monarchmoney.com slash OFD. That's M-O-N-A-R-C-H M-O-N-E-Y.com slash OFD for your extended 30-day

[00:11:09] free trial. One of the things that I really love about hosting the show is that I get to learn

[00:11:16] right alongside you. And if I could offer any kind of encouragement to listeners, it would be this,

[00:11:23] you don't need to know everything about personal finance to take charge of your financial health.

[00:11:29] You just need to know enough to be able to effectively navigate your current situation.

[00:11:34] Admittedly, this article intimidated me. I find annuities complex and confusing. And this is

[00:11:40] actually the first time I've ever read about reverse mortgages. But that's okay because at

[00:11:45] one point I didn't know how to get out of debt or save money or invest either. And look where I am

[00:11:50] now. I did find this article really interesting though, and it made me want to do some more

[00:11:55] research on reverse mortgages. I can see why Darrow recommends this as a last resort and that

[00:12:01] it only makes sense for people with certain unique circumstances. One of the things I read that gave

[00:12:07] me pause is that the reverse mortgage must be repaid when the borrower dies, permanently moves

[00:12:13] out or sells the home. And you're accumulating interest through the life of the loan that

[00:12:19] eventually needs to be paid back. So if you want to leave your home to your children, for example,

[00:12:24] having a reverse mortgage on the property could cause problems if your heirs don't have the funds

[00:12:29] needed to pay off the loan. Another thing to consider is that in order to benefit from the

[00:12:35] reverse mortgage, you need to be healthy enough to continue living in your home. If an individual's

[00:12:41] health declines to the point where they must relocate to a treatment facility, the loan must

[00:12:46] be repaid in full. So a reverse mortgage might not be the best long-term strategy for someone

[00:12:52] who has growing health concerns as they age. And that's another episode of Optimal Finance

[00:12:58] Daily in the Books. Thank you for your support and for listening every day. I'll be back tomorrow

[00:13:03] where optimal life awaits.