Is Your Nest Egg Hidden In Your Nest?!

Many retirees have overlooked the nest egg they’re living in.

Many retirees have overlooked the nest egg they’re living in.

Do you have a nest egg? You might, but you may not even know it.

That’s because your nest egg may actually be your “nest,” that is, the home you live in now.

If you own a home and have paid off all or a good portion of your mortgage after making years of payments and you meet the qualifications, such as being at least 62 years old, you may be able to tap into your nest as a way of creating your very own nest egg.

Today’s “Nest Egg”

While everyone hopes to have a “nest egg,” — money saved up somewhere for retirement — the reality is that today’s retirees face many challenges when it comes to saving. Even those who have planned well are facing new and unforeseen hurdles that are leaving them with a nest egg that is smaller than what they need.

There are a few factors working against today’s retirees that are shared by many:

Rising longevity. Americans are living longer. According to 2012 National Center for Health Statistics data, life expectancy in the U.S. was an average of 78.8 years, marking a record high. Many families have not saved for rising healthcare costs that they are likely to face later in life, or they have crafted a saving plan that uses a shorter life expectancy in their calculations. Generation to generation, rising lifespans are causing added stress for families that simply have not considered how long they may actually live.

Generational pressures. For many nearing retirement, adult children have graduated from college with debt and are moving back into the nest with Mom and Dad. In some cases, financial pressures come from both children and parents, giving rise to the “Sandwich Generation.” This is the new name for people, typically a sub-segment of baby boomers, who are responsible for bringing up their own children and for the care of their parents.

In 2013, the Pew Research Center published findings from its survey of American adults ages 40 to 59 indicating that roughly half, or 48%, had provided financial support to a grown child in the past year, with 27% of those providing the primary support.

According to the same survey, about 1 in 5 middle-aged adults had provided financial support to a parent age 65 or older.

Being “sandwiched” between parents and children who are in need of financial support puts added stress on this population and any nest egg that they have amassed.

Investment shortfall. Many investors saw stocks fall as a result of the 2007 financial crisis, and some moved their investments out of equities prematurely.  They lost the opportunity to regain the value of those assets when the market recovered.

While the Dow Jones Industrial Average has recovered from those losses, selling investments prematurely has left some investors with a shrunken nest egg — not what they had planned on.  This is yet another unforeseen challenge retirees have faced.

Whatever the pressure, today’s retirees are finding that for a number of reasons their nest eggs are smaller than they had hoped.

Tapping Into Today’s Nest

Many retirees have begun to realize that their home could very well provide a substantial boost to a nest egg that is underperforming or has not met retirement expectations.

Built up home equity can actually act just like a savings account, in some cases with the potential to grow over time.

“Selling the home or taking a reverse mortgage to utilize home equity can be one answer.”

A reverse mortgage can allow qualifying individuals and households to reap what they have sowed over the years, essentially transforming their “nest” into a “nest egg.”

A reverse mortgage is a loan that allows you to tap into your home equity while you still live in the home. In this sense, you can have your nest egg and live in it too, essentially receiving payments or access to a home equity line of credit that can improve cash flow instead of relying solely on savings or other retirement investments.

Financial planners and even CPAs are beginning to recognize the value of reverse mortgages as retirement tools.

“For so many Americans, Social Security is the only guaranteed income for life that they receive,” said CPA Jean-Luc Bourdon, CPA/PFS, principal and wealth management practitioner for BrightPath Wealth Planning LLC in a September Journal of Accountancy article “Meeting the financial planning challenges of the future”. “So it’s become particularly important to look at strategies to optimize it.”

Home equity is a solid place to look for a strategy, he says.

“CPAs can also help clients evaluate home equity as a longevity safety net. We get to a point where many clients do face running out of money, and it’s important to address the question of what to do then,” he said. “Selling the home or taking a reverse mortgage to utilize home equity can be one answer. Overall, I encourage clients to create scalable plans that they can change as they move through their lifespan, and scale back when needed.”

Making a Nest Egg Out of Your Nest

If you are one of those households that has a substantial nest and you’re interested in utilizing it through a reverse mortgage, there are several pros and cons to consider.

Pros:

  • A reverse mortgage is a non-recourse loan. This means that when the loan comes due after a qualifying event, you and your heirs will never have to repay more than your home is worth at the time of sale. It’s a nice protection to consider if you do choose to make your nest your nest egg.
  • New protections have made reverse mortgages safer than ever. A series of new rules implemented in 2014 and 2015 have improved the safety of reverse mortgages. These changes include non-borrowing spouse protections and new financial criteria for borrowers.
  • Loan payout options give borrowers flexibility. Borrowers may opt to tap into their nest through a number of different options. They may choose to receive a lump sum, ongoing term or tenure payments to boost monthly cash flow for as long as they’re in the house, or they may opt to turn the home into a line of credit that can be accessed at any time. Unlike a home equity line of credit, the lender can’t freeze the credit line and it grows over time.

Cons:

  • A reverse mortgage is still a loan. At the end of the day, the borrower will need to repay the loan when it comes due. Many families pay off the loan by selling the home.  Others choose to keep the house by refinancing or paying off the loan.
  • You can exhaust your home equity. While borrowers can remain in the home until the loan becomes due, they can use up all of their home equity.  If they chose the monthly payments for life (tenure payments), then they will continue to receive the payments despite having used up the equity.  If, on the other hand, they received the loan as a lump sum, or if they drew down on the line of credit in its entirety they will have spent through both their nest and their nest egg.  The new regulations mentioned above are intended to help borrowers avoid this unhappy outcome.

Watching Your Nest Egg Grow

One little known feature of a reverse mortgage is that when the funds are accessed as a line of credit (LOC), it can actually give you access to more funds over time.

Through this LOC growth feature offered by Home Equity Conversion Mortgages (HECMs), the reverse mortgages that are most common and are insured by the Federal Housing Administration, borrowers can actually access a larger line of credit the longer they wait to tap into it.

For this reason, many financial planners advise households that are going to take a reverse mortgage line of credit to do so as soon as they can qualify. By leaving the credit line untapped, that line will grow over time, giving access to even more funds down the road.

There are some additional benefits as well to considering a reverse mortgage LOC rather than a traditional HELOC. Reverse mortgage borrowers do not have to make ongoing payments as they might in a HELOC. (However, if they would like to make payments, they are able to do so.) The reverse mortgage LOC also does not require any annual fees to keep the line of credit open. It also does not come with a prepayment penalty as many HELOCs do.

CFPs Shaun Pfeiffer, Angus Schaal, John Salter conducted a 2014 study finding that “early establishment of a HECM line of credit in the current interest rate and lending environment consistently provides greater survival rates than those strategies where the line of credit is established after the investment portfolio is exhausted” [editorial note: the word ‘survival rates’ as used here refers to the longevity of all assets used to fund retirement].

Their study ultimately urges retirees to establish the reverse mortgage LOC early so that they can make the most of their nest egg over time.

If you are one of those retirees who is stressed by the additional pressures of aging parents, adult children, a shrunken investment portfolio or rising life expectancy, you may still have a very solid nest egg in your home equity. In reaping what you have sown through a reverse mortgage, you may be able to vastly improve your financial outlook through retirement.

Use a reverse mortgage calculator to determine how much you may be able to qualify to borrow in an effort to transform your nest into a retirement nest egg!

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