By: Dividend Sensei
In my last article I explained how not buying a home could ultimately add $1.1 million or more to your retirement portfolio. But while that strategy works great for those with plenty of years to go until they retire, it might not work for the millions of Americans who are nearing their golden years and who are worried about not being able to maintain a good standard of living.
That’s understandable given that a recent study by the Economics Policy Institute found that the average family aged 55 to 61 has just $163,577 saved for retirement. Given that to ensure you never run out of money in retirement requires a retirement portfolio of about $750,000 per person there are few realistic ways for someone with just one to 15 years until retirement to grow their portfolio that large. At least not without taking crazy amounts of risk such as gambling it all on Bitcoin or other cryptocurrencies, which investors should avoid like the plague.
But there is good news for those that indulged in the forced savings plan that is buying a home. It’s a potentially great solution that can provide a steady and guaranteed income in retirement that, combined with social security and whatever nest egg you have managed to build up, might be enough to provide a comfortable or even prosperous standard of living during your golden years.
Why The Reverse Mortgage May Be Right For You
A reverse mortgage is a loan for seniors age 62 and older that was introduced in 1989. They are insured by the Federal Housing Administration and let you tap the equity in your home to receive money up front without having to actually make mortgage payments. Depending on how the mortgage is structured you can either get all the money up front, a set amount every month for a fixed number of months, or a fixed amount for as long as you live (up to the value of the home or $679,650 whichever is smaller).
What are the main benefits of a reverse mortgage? Well the main one is that you don’t have to make any monthly payments as long as you live in the home. So unlike the option of selling your home and downsizing into something smaller you don’t have to change your life. And unlike a second mortgage or home equity line of credit you don’t have to make any payments. So how does the loan get paid off? If you move, sell the home, or die then the loan comes due and either the home is sold to pay off the loan or your heirs pay it off (and can then keep the house).
How much can you get from a reverse mortgage? Well that will depend on a number of factors including:
- Your age (if a couple takes out the reverse mortgage the age of the youngest person is used for the calculation)
- The value of your home
- The equity in your home (you can take out a reverse mortgage even if you have an existing mortgage that is mostly paid off)
- Interest rates at the time
- Your health/expected life expectancy
Here’s a good calculator for estimating how much you could get from a reverse mortgage. I’ll use my own home as an example. Currently it’s worth about $280,000 according to Zillow and the mortgage is paid off so the home equity is $280,000.
Now for the purposes of this estimate I assumed I was taking out this mortgage at the age of 62 and borrowing the full amount. Currently mortgage rates are about 4.5% which means that with the mortgage insurance required for this loan the interest rate is 5%. After deducting the total fees and costs over a 20 year period I would be able to obtain $1,110 per month in income from this reverse mortgage.
That’s not enough to live on by itself but if you factor in the average social security benefit of $1,400, then you suddenly get to $2,510. And if I were married and my wife also retired that climbs to $3,910 or $46,920. Finally if you assume a total retirement savings of $200,000 and use the 4% rule to ensure you never outlive that nest egg, this brings the total to $4,577 per month or $54,920 per year in total retirement income for me and my (hypothetical) wife. Not lavish living to be sure, but it’s enough to live comfortably on. But of course nothing is perfect and there are several negative factors to consider before getting a reverse mortgage.