A survey from the Journal of personal finance showed that half of respondents agreed with the following statement.
“The thought of my retirement portfolio balance going down over time brings me discomfort, even if the decline in value is a result of me spending money on my retirement goals.”
Another survey from Blackrock found that on average across all wealth levels, most current retirees still have 80% of their pre retirement savings, almost two decades into retirement. So, almost 20 years in retirement, they still have 80%, of what they had saved for retirement. And more than a third of current retirees actually grew their assets.
Why don’t people spend money in retirement?
And the answer is because of uncertain futures, we don’t know what the future holds.
There’s been tons of surveys completed to see what the biggest fears are for retirees.
- The number one fear on every survey is always the fear of running out of money in retirement.
- The second one is the future health care costs.
- The third one is long term care costs.
- The fourth one that sometimes comes in higher is changes to Social Security.
Both health care costs and long term care costs can both contribute to the number one fear of running out of money in retirement.
It makes sense that people don’t want to spend their money. They’re don’t want to spend it because they are worried they’re not going to have the money available to deal with those big financial shocks, if and when they pop up.
The third reason people don’t spend money in retirement is the lack of faith in their retirement plans.
They’ve done their own retirement planning, and they’re not feeling confident in their own planning skills. Or they’re working with a financial planner and have a lack of faith in the plan their advisor has set up for them.
There is a an emotional and security part to this as well. People are going feel much more secure and safe by having all that money in retirement to deal with financial shocks at some point in the future. The issue, though, is that most people don’t enjoy the retirement the way that it should be.
So here’s some questions for you:
What if you had another growing source of cash as a backup plan – would you be less worried about running out of money in retirement? Would you be willing to spend more in retirement?
- Would you travel more?
- Would you go see the grandkids more?
- Would you fly the grandkids to come see you?
- Would you gift more to a charity are tithe to your church?
- Would you spend more money on your hobbies?
- Would you spend more on entertainment?
If you had another growing source of cash as a backup plan? Would you spend money out of your retirement portfolio? I think most people would.
The issues is that most people are unaware of this option. That there is a potential source of growing funds that they can use as a backup, in case they do run out of money, or in case there are other large financial shocks that pop up during their retirement.
So let’s take a look at the scenario have Greg and Carolyn.
- They’re both 65 – They’re young and in their go-go years.
- They have a household income of $5,500 a month.
- They have $350,000 in retirement savings.
- And they own their $450,000 home free and clear.
They want to travel; they want to do other things to enjoy their retirement. They want to have other life experiences, but they feel constrained, and they’re worried about running out of money. They’re also worried about having enough money to pay for health care at some point in the future.
They’ve been “what if’ing” all of the possible things that could go wrong and have become paralyzed by the what ifs. What if this happens? What if that happens? What if this and that happens?
By running all these what ifs and worst-case scenarios, they’ve become paralyzed and do not want to spend any money out of their retirement savings. And therefore, they’re going to forego enjoying the retirement that they wanted, and that they deserve, and that they’ve worked hard for because they’re worried about running out of money in retirement.
Greg, and Carolyn, they reached out to me, because they really do want to do these things. But they are just worried about running money out of money, and they wanted to see if there was a way for them to have the retirement they wanted without the stress and fear of running out of money.
There is, and that alternative is to get a reverse mortgage.
We looked at three different options for Greg and Carolyn.
The first option was to get a reverse mortgage today as a backup plan and draw $1,900 a month from the IRA so they can go do all the fun stuff that they want to do.
This scenario is represented by this bar following bar chart:
Numbers in illustration based on interest rates of 7/27/2023. Initial APR of 8.08%. The loan has a variable rate which can change each month. The rate is ties to the 1 Year CMT with a margin of 2.75%. There is a lifetime cap of 5% on the initial rate. The growth rate used in the illustration is based on the expected rate of 6.56% plus .5%. Estimated closing costs $17,429. Closing costs will vary by state. For illustration purposes only. Not a commitment to lend. Assumes no payment made. The content within this video is provided solely for illustrative purposes, and outcomes cannot be assured. The information is derived from distinct individual client scenarios, each of which is subject to variation.
The blue bar represents the home value, and we’re assuming a 4% appreciation rate, which historically is pretty accurate.
The orange bar represents the loan balance, and we can see this loan balance is growing over time. The reason the loan balance is growing in this scenario is because we are making the assumption that Greg and Carolyn are not making a monthly mortgage payment. (they still have to pay their property taxes and insurance) Because they’re not making a monthly payment, the interest in mortgage insurance is getting added to that loan balance, therefore, it’s growing over time.
The green bar represents the ling of credit. This is their growing source of backup funds. We can see this line of credit is growing over time as well. And that’s because any funds available in this line of credit are growing at the current interest rate, plus half a percent. You can see by the time they are 80, they’re expected to have $456,000 in this line of credit, which is pretty awesome.
What’s also great about this, this line of credit is growing regardless of what’s happening to home value. Even if home values were coming down, this line of credit still continues to grow.
Greg, and Carolyn didn’t really like this growing loan balance. They decided to make a monthly payment towards the reverse mortgage. They’re going to pay $345 a month for five years. But they’re also going to be drawing $1,900 a month from their IRA. This scenario is represented by the following chart.
Numbers in illustration based on interest rates of 7/27/2023. Initial APR of 8.08%. The loan has a variable rate which can change each month. The rate is ties to the 1 Year CMT with a margin of 2.75%. There is a lifetime cap of 5% on the initial rate. The growth rate used in the illustration is based on the expected rate of 6.56% plus .5%. Estimated closing costs of $17,429. Closing costs will vary by state. For illustration purposes only. Not a commitment to lend. The content within this video is provided solely for illustrative purposes, and outcomes cannot be assured. The information is derived from distinct individual client scenarios, each of which is subject to variation.”
Again, the blue bar is the home value.
The orange bar is the loan balance. We can see by year five, they have this thing almost paid off. Now, they can’t pay it off completely, because if they do that the loan would go away. And that defeats this whole strategy.
We can see in 10 years, that $44 has grown to $88. Not a big deal.
The green bar is the reverse mortgage line of credit. But in this scenario, is significantly larger. If we look in 15 years, they have over half a million dollars available in this line of credit. In the first option, they only have 456,000 in 15 years. In this option, they have 506,000. They’ve added $50,000 to this line of credit, because of making the payment of $345 a month for 5 years.
The reason being is that any payment that’s made towards the reverse mortgage loan balance, not only pays the loan balance down, but it increases that line of credit dollar for dollar. And any funds that are available in that line of credit are growing at the current interest rate plus a half a percent.
By structuring the reverse mortgage this way and making those monthly payments. They’re creating a significantly large amount of funds that are growing as a backup plan as they’re spending the money out of their IRA.
Let’s say in 10 years, they needed to draw out $50,000 from their line of credit to replace their roof. They still don’t have to make a monthly mortgage payment towards the reverse mortgage. (they still have to pay their property taxes and our homeowners insurance)
On top of that, drawing funds out of this line of credit are income tax free. The funds from the reverse mortgage are considered a loan proceeds and therefore not taxable.
The third option is to get a reverse mortgage and spend the money out of the reverse mortgage first allowing that IRA to grow.
This is represented by the following chart:
Numbers in illustration based on interest rates of 08/2023. Initial APR of 8.08%. The loan has a variable rate which can change each month. The rate is ties to the 1 Year CMT with a margin of 2.75%. There is a lifetime cap of 5% on the initial rate. The growth rate used in the illustration is based on the expected rate of 6.56% plus .5%. Estimated closing costs of $17,429. Closing costs will vary by state. For illustration purposes only. Not a commitment to lend. The content within this video is provided solely for illustrative purposes, and outcomes cannot be assured. The information is derived from distinct individual client scenarios, each of which is subject to variation.
In this scenario, they’re drawing $1,900 a month from the reverse mortgage line of credit. They will continue to do that for seven years and then stop. This isbecause once they turn 73, they will be required to start drawing money out of their IRA, due to the required minimum distributions.
The government knows that people are afraid to spend their retirement money. Starting at age 73, they actually start forcing them to draw money out of their retirement in order for the government to get their taxes that are due.
The blue is the home value.
The orange is that loan balance. We can see this loan balance is growing quite significantly over time. This is because they are drawing $1,900 a month. Every time they draw $1900, that draw gets added to the loan balance.
On top of that, we’re making the assumption that Greg and Carolyn are not making a payment. (they still need to pay their property taxes and their homeowners insurance) The interest and mortgage insurance is getting added to that loan balance. That’s why it’s growing over time.
The green is the reverse mortgage line of credit. We can see they’re drawing that down over time, because they’re drawing $1,900 a month. Then in year seven, they will stop taking draws.
You can see this line of credit then continues to grow from there. In 15 years, they’re still expected to have a $95,000 line of credit.
Now, you may be thinking, why on earth, would we draw the money out of this thing and have this, this growing loan balance. And the is because they’re leaving the IRA alone, they’re just letting that IRA grow.
Greg and Carolyn have 4 different options. We have covered three so far, but the other option is to do nothing at all.
Out of all these options, I think most people would lean towards option number two. And that’s because by the time that Greg and Carolyn are 80, they have $729,000 of funds available between their IRA and their reverse mortgage line of credit.
This is not financial advice. Seek the advice of other licensed professionals such as a financial advisor, CPA and attorney to decide if this planning option is right for you. This is for illustrative purposes only to show what might be possible through the strategic use of a reverse mortgage as part of an overall retirement plan. The IRA balances make the extraordinary assumption that the IRA balance has continuous growth at 5% annually. Drawing $1900 a month from the IRA is drawing at 6.51% which is much higher than the standard practice of a 4% withdrawal rate. Draws from your IRA will likely be taxed on a Federal and state level. Consult with a CPA or other tax advisor. All numbers are forecasts and are for illustrative purposes only. Future outcomes are not implied or guaranteed. The content is provided solely for illustrative purposes, and outcomes cannot be assured. The information is derived from distinct individual client scenarios, each of which is subject to variation.”
If we look at doing nothing at all, they would only have $517,000 available when they’re 80. There’s a $212,000 difference between getting the reverse mortgage as a backup today, versus doing nothing at all.
Now, the other thing we got to look at is with a reverse mortgage, getting that as a backup plan, making that that monthly payment for five years, they’ll be able to draw $342,000 over that 15 year period to go and do all the things that they want to do, have a fun and comfortable retirement, a retirement that they deserve.
The one place that the doing nothing at could be the clear winner is if you want to leave the largest estate for your heirs.
I think most people would rather have fun during their retirement. They want to have fun without that fear of running out of money hanging over their heads. This is why I think option two makes the most sense.
All three options are leaving more funds available than doing nothing at all. In this example, getting the reverse mortgage reduces that chances of running out of money
Want to see how this would work for you. You want to see what your numbers would look like and what your options are. You want me to do some forecasting to see what this could look like for you? Give me a call at 541-897-4464.
There’s no cost or obligation to speak with me. And of course I’m happy to answer any and all questions that you have about reverse mortgages. So give me a call and I look forward to speaking with you.
