Scenario: Borrower is retiring at 62 and his income will drop from his $100,000 per year salary to $40,000 per year. He must remain in his home for another five to ten years before he can sell, at which time he plans to move to a retirement community down south.
PROBLEM: His retirement budget will require $80,000 per year cash flow, at least until he sells his home. But his retirement income leaves him $40,000 per year short. Where will the additional funds come from?
Diagnosis: Borrower has options.
- He has an IRA which he can draw from; but these withdrawals are considered taxable income. It would cost him over $10,000 in taxes for every $40,000 in spendable dollars he withdraws. He would have to withdraw over $50,000 in order to spend $40,000. In addition, if borrower utilized his IRA, he would incur lost opportunity costs, as the portion of his investment withdrawn would no longer be invested and growing.
- He can take early distributions from Social Security; but this would prevent him from claiming the larger social security benefit he would be eligible for in a few years. Besides, his SSI benefits would only put a dent in the $40,000 per year shortfall.
- He has a significant amount of equity in his home that could be used to close the $40,000 per year cash flow gap.
Solution: Performed a complete financial analysis to confirm the borrower’s financial resources, budgetary requirements, lifestyle needs, and ran best-case and worst-case scenarios regarding his time horizon to keep his home. Consulted and coordinated with his Financial Advisor. Determined a Reverse Mortgage would allow him to convert his equity into a tax-free monthly stipend which would close his $40,000 per year cash flow gap.
As a result, his IRA funds would remain invested and compounding for another five to ten years. He would save between $50K and $100K in income taxes, as he would no longer incur the taxable event of withdrawing $40K-$50K per year from his IRA. Since he would defer withdrawals, his retirement funds would last longer. And he would delay social security benefits which would result in larger benefits when he ultimately did file.
Lastly, borrower may receive a large tax deduction when he ultimately sells his house (as mortgage interest on a Reverse Mortgage is tax deductible in the year that it’s paid). This deduction could potentially offset a large taxable IRA distribution, which would effectively make the distribution tax-free!
Result: Retirement assets preserved. Social Security benefits preserved. Taxable events avoided. And budget gap closed.
BOTTOM LINE: A Reverse Mortgage is a wonderful tool and can be a life saver for some seniors. But they are NOT appropriate for everyone. In order to confirm whether a reverse mortgage is right for you, ensure a reverse mortgage is used correctly, is complementing your financial plan, helping you to preserve your wealth, and sustain your retirement, you MUST utilize competent and qualified financial professionals. Only entrust your time, money, and mortgage to a seasoned, professional, and Certified Mortgage Planning Specialist® with a proven track record.
NOTE: This article and overview is provided for informational purposes only and does not constitute legal, tax, or financial advice. Consult with your tax and investment advisor for specific advice pertaining to your situation.
Warren Goldberg is President of Mortgage Wealth Advisors, a Certified Mortgage Planning Specialist®, and a published author. His interviews include Blog-Talk Radio, Newsday, The Daily News, Anton Press, and the Long Island Herald. Since 1992, he’s been sharing his financial knowledge and wealth-building strategies, including how to properly use your mortgage as a financial tool. His clients regularly express their trust and appreciation by recommending friends and family call when in need of mortgage, real estate, and financial guidance.
This material is not from HUD or FHA,
and has not been approved by HUD or a government agency.