Supplemental Social Security good, but strings attached
Q: Do you have any information on Supplemental Social Security? I retired at 59 and was visiting family, and they asked if I had heard of this. I have read a little on this, but it seems to differ from state to state. - R.G., San Antonio, Texas
A: The Supplemental Social Security program (SSI) provides retirement income for some workers. The federal amount is $733 a month for a single person and $1,100 for an eligible person with an eligible spouse. Different states supplement this base amount with more money. In California, for instance, the monthly benefit for a single person is $889.40. The benefit for a couple is $1,496.20.
You can learn the basics on the Social Security website by going to ssa.gov/ssi. It's important to note that this is a welfare program, so there are strict limitations on assets.
Q: My 80-year-old father asked me to read your recent newspaper article about reverse mortgages. He is looking for a retirement income solution. My understanding of reverse mortgages is they are a high-fee product and a last-ditch effort for most people.
I suggested to Dad that he take a closer look at getting a home equity line of credit instead of a reverse mortgage. Dad would like to have $50,000 to $100,000 more in his cash account to be able to continue his normal lifestyle for the rest of his life. In this situation, do you think a reverse mortgage or a home equity line of credit would be best for him? - S.A., by email
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A: Taking out a reverse mortgage is expensive when compared to the cost of taking out a conventional home equity line of credit. You can get home equity credit lines with minimal expense and at low interest rates, sometimes below 4 percent.
I used financial planner Wade Pau's reverse mortgage calculator to explore costs. Your dad would face about $4,000 in closing costs and the initial mortgage insurance fee. He'd also face a loan origination fee up to $5,250, about 2.5 percent of the credit line. The credit line would net to a bit over $210,000. The total cost compares well to a great many insurance-based products.
But your parents might not need that much credit. And they would likely pass the income testing required to get a home equity credit line of $100,000 or less. (Some people wouldn't, which is another reason some older people go straight to a reverse mortgage. Another reason is that a conventional credit line requires monthly interest payments. A reverse mortgage requires no payments.)
So let me make a suggestion. Your parents can take out a conventional home equity line of credit. It may be enough. If it is, they'll avoid all the expense of a reverse mortgage and see less equity disappear to interest payments. If it isn't enough, they can apply for a reverse mortgage and use some of the proceeds immediately to pay off the conventional credit line. Then they can use the new reverse mortgage credit line to meet more of their expenses.
You should remind your dad that there is no need to take all the money at once. Either way, it is a credit line. Taking more than he needs only increases the interest charges. The big caution here is that either loan could become a mess. How? Simple. Expenses could exhaust both their financial assets and their home equity before they die.
It could happen. If it does, the problem wasn't caused by a home equity line of credit or by a reverse mortgage. The expenses we face in getting old are the cause. That's why you've seen positive references to Continuing Care Retirement Communities in my column. The CCRCs solve the shelter/nursing care conundrum for older people willing to move.
• 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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