Planning for a comfortable future at 62
Age 62 is a good time to take stock of where you are financially, and where you are going. You become eligible for Social Security at 62, though it may or may not be to your advantage to begin drawing it then. You are just a few years away from being eligible for Medicare. If you own your own home, furthermore, you become eligible for a HECM reverse mortgage at 62.
In counseling seniors who are involved in this process, I often encounter novel situations that force me to think about issues that I never thought about before. One such issue arose today in connection with a senior seeking my counsel on his retirement game plan. The issue was whether the expected life of a retiree affects a retirement plan.
The retiree who consulted me is now 61, his spouse is 62, and he is planning to purchase a home in a warmer state. He has liquid assets about equal to the price of the home he is planning to buy. He plans to draw Social Security at 62, and has two small pensions, one terminating in 10 years, the other in 20 years.
A reverse mortgage was not part of his plan; he had given it no thought. My view is that any homeowner whose retirement is not 100 percent secure could profit from a HECM reverse mortgage.
While no two retirement plans are exactly alike, the HECM is extremely flexible and can be adapted to a wide variety of financial needs. Hence, I explained to the retiree the various ways in which a HECM reverse mortgage might strengthen his plan.
He could use the HECM to finance the home purchase, minimizing his cash drain. But his liquid assets generate very little income, which means that liquidating them to purchase the house would be more cost effective than taking a mortgage of any type. Further, when a HECM is used to minimize the cash drain on a house purchase, no borrowing power remains in later years for any other use. I recommended against this use of a HECM.
He could use the HECM to draw a fixed monthly payment for as long as he lived in the house. I recommended against this use of a HECM, as well, because his income needs are not uniform over time. He may want more income in the first nine years of his retirement so that he can defer taking Social Security, or his need might peak in 10 or 20 years when other income sources go away.
He could use the HECM to supplement his income for the period until he hits 70, allowing him to defer Social Security payments until then, at which point the payment amount would be substantially larger. I recommended this use of the HECM. If the temporary income supplement needed by the senior does not exhaust his HECM borrowing power, the HECM would be available for other purposes later on.
Because his pensions terminate after 10 years in one case, and after 20 years in the other case, the borrower risks a significant decline in income at those times. An HECM used to offset such declines in income would be taken as a credit line that is allowed to grow unused until it is needed. The line will grow at a rate equal to the mortgage rate plus the mortgage insurance premium rate. I also recommended this use of the HECM.
Whether the HECM could provide both a temporary income supplement and a reserve against future income declines depends on how much is needed for each use.
In response to my recommendations, the senior gave me another piece of relevant information. He said no one in his or his wife's family have lived to be very old. "Rarely does anyone in the family get to 78," he said. How should that affect the retirement plan?
For one thing, it upended the decision on when to take Social Security. If someone of 61 does not expect to live to 78, they should take Social Security at 62 because the higher payment at age 70 would not last long enough to offset the years of zero payments. Hence, I retracted my recommendation for using a HECM to provide a temporary income supplement, since the purpose of the supplement was to enable the senior to delay taking Social Security.
A short life expectancy also means the senior will probably die before his pensions terminate, which would mean that a reserve against future income declines consisting of an unused HECM credit line probably would never be used. That is not a reason to avoid a HECM-based reserve, however, because the reserve might be needed, even though the probability is low.
No retiree wants to live with even a small risk that they can become impoverished by living too long. The HECM credit line reserve is insurance against that risk. The cost, if the line is not used, is the small HECM loan balance which would be deducted from the house sale proceeds that accrue to the borrower's estate.
• Contact Jack Guttentag via his website at mtgprofessor.com.
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