The surprising way to stretch your retirement savings
The temptation to start collecting monthly Social Security checks at age 62 is hard to resist, but claiming the benefit too early can have damaging consequences for your overall retirement funds. According to Kiplinger.com’s October list of "Financial Decisions You Will Regret in Retirement," taking the money as soon as you are eligible at 62 is actually considered one of the worst mistakes you can make in your lifetime by many advisors.
That's because the longer you wait to claim benefits, the more money you are eligible to receive in your monthly check. The Social Security Administration says the increases from delaying your benefit can be large and explains that a worker would receive $750 a month if she starts her benefit at age 62, but $1,000 a month at her full retirement age of 66. Or, if she delays until age 70, she would receive $1,320 a month.
There are obvious advantages to waiting until age 70 to claim Social Security, but for individuals who can't or don't want to continue working that long, it might not be so easy to defer the monthly cash benefit.
Certified financial planners Neil Krishnaswamy and Tom Davison say older adults do have options for filling the financial gap until they are eligible for their maximum benefit at age 70. Both experts outlined strategies that incorporate housing wealth early on in retirement instead of using home equity as a last resort option, which has been the conventional wisdom until recently.
This can be achieved by either selling the home and downsizing or, if you plan on staying in your current home for many years, using a reverse mortgage to convert part of the home's value into a liquid asset.
"Setting up a reverse mortgage with a term payout that lasts eight years is one idea to consider in this scenario,” Krishnaswamy wrote in an article posted to Forbes.com on Oct. 12. He explained how the loan proceeds can help bridge a homeowner’s finances by replacing all or a portion of the income Social Security would have provided during the interim.
A reverse mortgage can also make sense for affluent retirees in high tax brackets seeking to maximize their Social Security benefit. Davison, a wealth manager and researcher in Columbus, Ohio, wrote a 2014 case study, “Delay Social Security: Funding the Income Gap with a Reverse Mortgage” that showed how using a reverse mortgage line of credit to bridge the gap can dramatically improve a retirement financial plan.
Instead of spending down an IRA or other investments where withdrawals are taxed, withdrawals from the line of credit, which are not taxable income, can be used to pay expenses. This allows the investment portfolio to grow until the first required minimum distribution at age 70, the same year the retiree can claim the maximum Social Security benefit.
Davison emphasized the long-term benefits of the reverse mortgage line of credit if the borrower is able to put money towards voluntarily repaying it over time. The reverse mortgage line of credit will grow at a reliable rate and can be used to support spending later in life when fewer borrowing options are available.
A reverse mortgage is a loan that enables homeowners that are generally 62 or older to use part of their homes’ equity to obtain cash proceeds that can be used in many ways, without giving up ownership of the house. Borrowers may choose to draw their funds as a lump sum, as a monthly term or tenure payment, or they may choose to create a line of credit that can be drawn upon on an as-needed basis; borrowers may also choose a combination of a monthly payment and a line of credit.
The loan does not have to be repaid until the last surviving borrower or remaining eligible non-borrowing spouse passes away or permanently leaves the home, or fails to meet loan obligations that include paying property taxes and insurance, and keeping the home maintained.
There is no penalty for repaying all or some of the loan early, and as Davison stresses, repaying the line of credit when expenses are low will enable it to grow and make funds available later on when you need it.
To learn more about reverse mortgage loans and how using home equity can fit into an overall financial plan, visit www.reversemortgage.org/equity, a consumer education website hosted by the National Reverse Mortgage Lenders Association.