SCENARIO: Sixty-two-year-old homeowner is retiring. He must remain in his home for another five to ten years before he sells and moves to a modestly priced retirement community in the south. Yet his income will drop from his $100,000 salary to just $40,000 per year.
PROBLEM: His retirement budget requires $80,000 per year cashflow, at least until he sells his home. Yet his retirement income leaves him $40,000 per year short. How will he make ends meet?
DIAGNOSIS: This gentleman has options:
1) He can withdraw from his IRA. However, these withdrawals would be taxable. It would cost him approximately $10,000 in taxes for every $40,000 he withdraws. Plus, his Financial Advisor advises he NOT tap his IRA, as he recommends at least another ten years of growth in order to project IRA distributions lasting the remainder of his lifetime.
2) He could take early distributions from Social Security. However, this would prevent him from claiming his maximum benefits if he waited a few more years. Besides, Social Security would only provide a fraction of what he needs.
3) The significant equity he has in his home could be used to close the $40,000 per year cashflow 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 and CPA. 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.
His IRA funds will remain invested and compounding for another ten years. Over this time, he potentially avoids approximately $50,000 in income taxes, as he won’t incur the taxable event of withdrawing money from his IRA. Plus, deferring withdrawals allows his retirement funds to last longer. Lastly, delaying social security benefits results in larger benefits when he ultimately does file.
As a bonus, this gentleman 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 could effectively make the distribution tax-free!
BOTTOM LINE: A Reverse Mortgage is a wonderful tool and can be a life saver for some seniors. However, they are NOT appropriate for everyone. 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.
______
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.
Leave a Reply