HECM offers another option to delay taking Social Security benefits until age 70.
One of the most significant financial decisions baby boomers will make involves deciding when to begin taking Social Security Agency (SSA) benefits. Making the wrong decision could end up costing an individual hundreds of thousands of dollars over his or her retirement lifetime. It’s essential that those approaching retirement study their benefit options and understand how each will impact their financial future. There’s no one-size-fits-all answer as to when to begin receiving SSA benefits. It all depends on each individual’s unique financial landscape and retirement goals.
The decision to begin receiving Social Security benefits will impact a number of financial aspects, such as:
- Cash flow
- Earned income
- Current income taxes + projected future taxes
- Retirement account assets
- After tax liquid investments
- Home equity
- Family longevity
- Medicare premiums
New retirees commonly experience great anxiety when the regular paycheck ceases and they realize they must now live on investments, retirement savings, a possible pension, and Social Security disbursements to achieve their spending and lifestyle goals.
In traditional planning, advisors focus on retirement cash flow that comes from traditional retirement plan assets, pension (if any), after tax investments, and social security benefits; while home equity is typically ignored.
“The lack of focus on home equity in retirement planning is nothing short of a complete failure to properly plan and utilize all available retirement assets.” (Jamie Hopkins, Associate Director of the American College for Retirement Income, Forbes October 7, 2015)
Retirees can opt to take early Social Security benefits at 62, which is usually not in their best interests. Most retirees look to Full Retirement Age (FRA) — at age 66 — as the time to begin taking Social Security benefits. However, waiting until age 70 (just four more years), increases Social Security benefits by 7%-8% annually, which is a very attractive return in today’s low rate of return environment. The challenge arises when a person’s situation requires he or she depend on Social Security benefits at FRA. In this case, how can one afford to wait until age 70 to take advantage of the increased benefit?
A Home Equity Conversion Mortgage (HECM) acts as a bridge that enables a recent retiree at FRA to delay taking Social Security benefits until age 70. In short, a HECM is a line of credit based on the retiree’s primary residence. With a HECM, retirees can access tax free funds at their discretion and at any time and for whatever reason they desire. HECMs do not require monthly payments; a characteristic that could augment retirement cash flow management.
CASE STUDY – Sally Uses Home Equity to Maximize her Benefits
Sally is a single individual who retired at age 62, four years before her Full Retirement Age (FRA), and whose assets include: $1,500,000 in an IRA; a home appraised at $400,000; and $50,000 in a checking account. Her annual before tax spending budget is $72,000. If she elected to take her Social Security benefits at FRA she would receive $1,300 per month. However, by delaying her benefits until age 70, the benefit would increase to $1,900 per month. Further, if she elected to take Social Security benefits at FRA, she would need to supplement her income from IRA distributions; both the SSA benefits and IRA distribution are taxed at ordinary income rates.
Sally qualifies for an initial $196,000 line of credit with a HECM. If she chose to delay her SSA benefits until age 70, she could take distributions from the HECM and her IRA to meet her annual spending budget. Distributions from the HECM are tax-free, which can enable Sally to better manage her income taxes by taking less out of her IRA. With a lower taxable income, her Medicare premiums will also be significantly less.
Consider this example: Sally accesses $1600 per month or $19,200 per year from the HECM. Since distributions from HECMs are tax free, she would not need to take as much out of her IRA to meet her annual budget; thereby reducing her income tax liability. At age 70, the loan balance will be $201,000 with a remaining line of credit of $127,000 that will continue to grow and remain accessible to Sally. The HECM lending terms do not require Sally to make payments on the funds accessed. This gives Sally the ultimate flexibility to manage her cash flow and income taxes.
|Age||Credit Line Available||Annual Distribution||Loan Balance|
In our example Sally stops taking distributions at age 71. The remaining line of credit continues to grow and she could use it in the future to cover unplanned expenses, such as long term medical needs (link to article). If the loan balance is greater than the value of her home when Sally vacates her residence, she would not be required to pay the difference of home value and loan balance.
A HECM might be appropriate for a variety of different planning needs. Learn more about HECM and how it can be used to prepare for the cost of long term medical care. It’s highly advisable that anyone approaching retirement age seek objective financial counsel before making the irrevocable Social Security Agency benefit election. An experienced advisor will assess the client’s overall financial landscape, consider all available assets, and develop a personalized financial plan. A comprehensive strategy will include a defined budget and account for future years’ tax projections.
Make sure you are not leaving retirement planning to chance
Learn more about how to weigh your Social Security benefit options by contacting us at Coyle Financial Counsel. Discover a better way to manage your finances.
Our proprietary approach, TransformingWealth™, is designed to get your arms around the big picture so you can make informed financial decisions with conviction. Ask Rob about Coyle’s TransformingWealth Preview Meeting, and schedule a complimentary consultation and start living the Good Life Managed Well™.
Rob O’Dell, CFP®, serves clients in our Naples, FL office. With more than 20 years of personal financial planning experience, Rob knows that successful financial planning involves a distinct process, not a one-time event.
Rob has been featured in the Wall Street Journal, Financial Planning Magazine, The Daily Herald and Money Magazine. He was a contributing author on the Third Edition of the Florida Domicile Handbook. Learn more about Rob O’Dell.
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