Reverse mortgage not a short-term solution
Q: Is it worth it to get a reverse mortgage if you think you may move in five to eight years? Wouldn't the costs be too high? Seems like you are trapped unless you have a boatload of cash to get out from under. Stuck for life is so claustrophobic. What if a gas well or loud rock band appears next door?
Home prices here are rapidly rising. My mortgage will be paid off in a few months, and I have nice, friendly neighbors. I have income from a pension, Social Security and a part-time job. I'm 72, in good health and have good insurance. Should I consider a reverse mortgage later if I am desperate? Or should I do it now? — C.E., Denton, Texas
A: The cost of getting a reverse mortgage is high. So you don't use one for short-term plans. The origination fee can be as high as 2 percent of the value of the home. That, in turn, is likely to be nearly twice the value of the credit line. In addition, you'll face the cost of mortgage insurance and “other closing costs” that are smaller than the origination fee, but larger than the cost of insurance. With costs like that, reverse mortgages are not for casual, short-term use.
Q: I will be 61 this year. My husband will be 74. We have state and federal pensions that generate about $85,000 a year. I have about $260,000 in a 401(k) and will collect Social Security benefits in the future. Our home is paid for. We have no other debt.
I am looking at when to take distributions from my 401(k) and when to collect Social Security. I am thinking it is best to wait until age 70 to collect Social Security. My estimated benefit then is $26,000 a year.
I recently read an article in an AARP publication that has me considering withdrawals from my 401(k) in an amount each year that would allow us to stay in the 15 percent tax bracket at least until I turn 70 and begin Social Security. Is this a good strategy, and if so, where should we put the money, as we don't need it for expenses? — M.P. by email
A: It probably won't pay for you to delay taking Social Security benefits until you are 70. The first clue comes from your husband's age, 74. Another clue comes from your expected future benefit.
Let's start with the age clue first. The combination of your age difference — 13 years — and gender suggests that you are likely to be collecting survivor benefits on your husband's record for a long time. There is about a 50 percent chance, for instance, that you could delay your benefits for nine years, only to have your husband die two years later.
That means you would have given up nine years of benefits but only collected two years of your higher deferred benefits. Then you would transfer to his record and higher benefit as his survivor. Since it takes about 12.5 years to recoup the benefits deferred in higher benefits later, your husband would have to live to a bit over age 95 (nine years of delay plus 12.5 years to break even) before you would enjoy any benefit from deferral. The Social Security life tables, however, tell us there is only an 8.3 percent chance that a 74-year-old man will still be alive at 95.
The other clue is your expected future benefit. If it were $26,000 a year at age 70, it would be about 57 percent of that if you took it at 62. That's about $14,820 a year or $1,235 a month. Your husband's benefit is probably a good deal more, so his benefit is the one that would continue into the future.
The bottom line is that you can wait another 9.5 years before you need to take an RMD from your 401(k) retirement account and you can use your Social Security benefit for whatever you please. It's also good to remember, if you are forced from the 15 percent tax bracket to the 25 percent tax bracket, that you'll still get to keep 75 cents of every additional dollar. More income is a great problem to have.
• Scott Burns is a principal of the Plano, Texas-based investment firm AssetBuilder Inc., a registered investment adviser. Questions about personal finance and investments may be sent by email to scott@scottburns.com.
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