Does Your Retirement Need a Plan B?
Does your retirement plan need a safety net?
The stock market fluctuates, illnesses occur, family emergencies happen and people are living longer today than ever before, which only stokes concerns of being able to pay for retirement.
Nevermind, that many of us simply have not saved enough. Our lack of a sufficient retirement plan practically screams, “I NEED A PLAN B!”
“A good retirement plan involves sufficient savings, strategies for spending, drawing from IRAs, taxation and health care,” says Jeff Bucher, president of Citizen Advisory, a comprehensive retirement planning firm in Perrysburg, Ohio. “But there also needs to be a contingency plan, just in case the initial plan you set forth goes awry.”
The good news is that you may not even have to look far for your most valuable “Plan B.” In fact, you may actually be living under its roof. It’s your home.
Using Your Home — Home Equity — as a Backup Plan
For most Baby Boomers, home equity is their largest asset — making it a really good safety net for their retirement.
“Having a Plan B is all about securing an income stream to sustain you in retirement. And while payments through Social Security, pensions or products like annuities can offer guaranteed protection, so can tapping home equity,” suggests Bucher.
“The use of home equity is going to creep into financial plans more heavily in the future,” he says. “It doesn’t make sense to live in a house that is paid for, only to be starving.”
There are several ways to tap into the value of your home, including:
- Home equity loans
- Home equity lines of credit
- Reverse mortgages
Downsizing is often the most financially efficient way to tap into your home equity. However, if you want to stay in your home, a reverse mortgage can be a really good solution.
Why Reverse Mortgages Make a Good Plan B for Retirement
Reverse mortgages are loans. You are borrowing your own home equity.
However, unlike a home equity loan, there are no monthly payments. To be eligible you have to be at least 62 years old and own your home outright, or have a mortgage balance that can be paid down at closing.
There are multiple ways to use a Reverse Mortgage as a back up plan. Here are 3 options:
1. Line of Credit: If you truly just want a back up plan, then setting up a reverse mortgage as a line of credit can be very efficient — there are up front fees, but you won’t pay interest on the money in the line of credit (only on any money you withdraw).
Reverse mortgage lines of credit have been gaining steam in retirement planning for the flexibility and peace of mind that they provide. Funds in the line of credit grow over time, so even if you do not need them now, you can tap into an amount that will be higher at a later time once you finally do need to access the funds.
Unlike a traditional Home Equity Line of Credit (HELOC), which requires a monthly payback, a reverse mortgage line of credit allows you to draw on the credit line as needed without making a monthly payment.
A HELOC can also be closed or reduced by the bank, whereas the reverse mortgage line of credit is guaranteed. This guarantee is a key feature that can also provide a lifeline against the unexpected.
“It’s a good thing to have that reverse mortgage line of credit open,” Bucher says. “It’s there if you need it, and it makes a lot of sense to have that credit line open for emergencies as a Plan B that’s waiting in the wings.”
NOTE: Perhaps the best time to set up a Reverse Mortgage line of credit is when housing prices are high and interest rates are low.
2. Set Up Monthly Income Payments: If you have sufficient home equity and you need additional retirement income, then a reverse mortgage can be set up to pay you monthly income for the rest of your life — no matter how long that might be.
This makes reverse mortgages a really interesting back up plan if your primary concern is cash flow or adequate retirement income.
3. Pay Off Mortgage or Get Cash Now: Perhaps you are in need of a plan B right now. Many people get a reverse mortgage to solve immediate financial problems. A reverse mortgage pays off any existing mortgage you might have — eliminating monthly mortgage payments and improving your household budget. A reverse mortgage also enables many borrowers to get immediate access to cash — to be used however you want or need.
Pros and Cons of Reverse Mortgages
The most common reverse mortgages found on the market today are known as Home Equity Conversion Mortgages (HECMs), which are backed by the Federal Housing Administration.
There are many advantages to a HECM reverse mortgage:
- Unlike a traditional “forward” mortgage, HECMs do not require borrowers to make monthly mortgage payments. Rather, in a reverse mortgage you receive payment from the lender via your home equity.
- The loan proceeds are tax-free and there are no restrictions on how you may choose to spend the money. That means you can use funds from a reverse mortgage to pay for medical expenses, home improvement projects, take a vacation, or however you may like.
- You or your heirs will never owe more on the loan than the value of the home when the loan comes due.
- You retain home ownership and get to keep living in your home.
It is important to note that while you may not be making monthly payments with a reverse mortgage, as you would with a traditional mortgage loan, you are still responsible for paying property taxes and insurance associated with your home.
- Possible reduction in the estate available to your heirs. Many retirees wish to pass on their homes to their heirs. You can do this with a reverse mortgage, but your heirs must pay off the loan and usually do this by selling the house. Heirs will never owe more than the value of the home (losses are covered by the federal government) are allowed to keep any equity left in the home.
- Up front insurance and fees can be higher than those paid in home equity loans.
Learn more about pros and cons of reverse mortgages.
Is a Reverse Mortgage a Good Back Up Plan for You?
“If all of your net worth is tied up in your home, a reverse mortgage might be a good opportunity for you to be able to live the lifestyle you want to live in retirement, all while staying in your home,” Bucher says.
The amount of proceeds you may be eligible to receive from your reverse mortgage depends on your age, current interest rates, the value of your home and your spouse’s age (if applicable).
Estimate your reverse mortgage loan amount today and start assessing your back up plan options.