A HECM can help you “have enough” to retire
About 4 million Americans will enter retirement in the next year. While most look forward to this new phase of life, retirees also struggle with fear. According to survey results released by CNNMoney in August 2016, retiring Americans’ single greatest fear is running out of money to fund their needs in retirement.
The survey lists the various fears arising from financial uncertainty and the percentage of respondents stating which one they worried about the most:
Having an unplanned emergency – 38%
Having unplanned medical expenses due to illness or injury – 34%
Having insufficient savings to retire – 32%
Outliving retirement savings – 21%
Becoming a burden to adult children or other family members – 20%
Each of these represents a valid concern for those entering retirement. But retirees today face a number of other risks, as well, which can impact the success of their retirement plans:
Longevity Risk – the unknown planning horizon
Market Risk – investment and interest rate volatility
Taxation – uncertainty of future tax policies
Inflation – cost of real living adjustments
Personal Spending – fixed and variable
Fixed – utilities, property taxes, food, healthcare
Variable – travel, entertainment, assisting family members
Financial advisors, engaged by those approaching retirement, take into account all of these factors as well as a number of additional variables when developing a retirement plan. These additional variables include Social Security benefits, pension, retirement savings accounts, after tax accounts, and other sources of income.
The advisor then assists clients in setting up short-, mid-, and long-term spending plans as well as helps them optimize their assets so as to meet future obligations.
But is this enough?
Most financial advisors neglect a very forgotten retirement asset: equity in a retiree’s primary residence. This equity can provide a crucial buffer against market slumps that adversely affect a retiree’s investment portfolio.
Using HECM as a First Resort Retirement Strategy
A HECM, which essentially is a standby expanding line of credit, gives homeowners a liquidity based on the home’s value and equity. The borrower can decide when and how to repay the lender. Until recently, financial advisors considered HECMs (aka reverse mortgages) as a last resort option for people who didn’t properly prepare and plan for retirement.
But, in 2013, the HECM underwent an overhaul, making it much more attractive as a tool for retirement planning. How an advisor suggests using a HECM during retirement depends on the individual situation and the stage of retirement. Establishing a HECM line of credit early on in retirement enhances financial flexibility in three ways:
Increase Portfolio Longevity and Growth Potential
Obtaining a line of credit through a HECM can increase your portfolio’s potential for growth. This strategy acts a a sort of longevity insurance that reduces your risk of running short on retirement funds later on. In this case, you would use funds from your HECM line of credit during market downturns, instead of drawing down on your portfolio and incurring a loss. Once the market (and your portfolio) recovers, you can pay back the funds you used from the line of credit. As you can see, using a HECM line of credit in this way represents a powerful strategy for increasing portfolio longevity and mitigating return risk.
Income Source While Delaying Social Security Benefits
Another use for the HECM during the early retirement years involves using it as a source of income while delaying Social Security benefits.(link to SSA HECM blog) By opting to delay receiving Social Security benefits, you’ll enjoy a larger monthly payout when benefits do begin. The HECM line of credit allows you to do this without sacrificing your lifestyle or drawing from an investment portfolio. After you begin receiving benefits, you can stop drawing from the HECM and repay what you used, if desired.
Alternative to Taxable Withdrawals from Retirement Account
HECM withdrawals are nontaxable, so in some cases, retirees may choose to withdraw from their line of credit rather than taking taxable withdrawals from a retirement savings account. This can help you avoid moving up a tax bracket and owing additional taxes and paying increased premiums for Medicare Part B and D coverage.
The line of credit is based on your home’s value, but one of the great advantages of a HECM is that it remains in place, as is, no matter what happens with your home value in the future. Although you can choose to repay what you use from the line of credit, you don’t have to pay it back if you don’t want to as long as you live in the home. Even if the primary borrower dies, the surviving spouse can also remain in the home as long as he or she likes with no requirement to pay back what was borrowed.
Don’t take chances, plan for retirement before you retire
Planning for retirement is complicated with many moving parts. At Coyle Financial Counsel, a fee-only firm, we utilize a team of experienced advisors to develop a comprehensive financial plan.
A HECM might be appropriate for a variety of different planning needs. The HECM is a proactive financial planning tool, it’s highly advisable that anyone approaching age 62 seek objective financial counsel.
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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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