Modern Retirement Problems Require Modern Solutions
Remember that the happiest people are not those getting more, but those giving more. – H. Jackson Brown
Society is Still Clinging to a Retirement Model that No Longer Exists
The renowned comedian Chapelle coined the phrase “Modern problems require modern solutions”, in the first episode of the season of his self-named show. This classic comedic line brings to mind the challenges older Americans face today. Modern problems such as only 21% of retirees having a company pension and a quarter of Americans have no retirement savings at all.
Due to a lack of retirement savings, high interest rates, and stubborn inflation, the wheels have fallen off the proverbial retirement wagon. But all hope isn’t lost for those fortunate enough to own their home in which they may have substantial equity. A CBS’s MoneyWatch column entitled, “Here’s when a reverse mortgage makes sense, experts say” points to four situations when getting a reverse mortgage may be the right choice.
The first is when retirees find themselves lacking the funds to live comfortably in their non-working years. Even those who diligently saved and invested over decades under the guidance of a financial planner could end up coming up short thanks to inflation.
Generally, financial professionals plan for an annual inflation rate of 2.5% However, inflation above this threshold places increasing stress on a retiree’s ability to maintain sustainable withdrawals throughout retirement. Many who believed their savings would be sufficient will keep their homes hoping to pass them on to their children. However, sustained inflation or an unforeseen financial shock can wreak havoc on the best-laid plans. Future stock market losses can further constrain future cash flow when coupled with the increased cost of living.
The second example when a reverse mortgage may make sense is when a retiree is considering taking out a loan to offset upcoming or current expenses. With both HELOCs and personal loans requiring monthly payments a reverse mortgage can provide access to cash without the burden of payments. Reverse mortgages stand alone as the only loan that doesn’t require the borrower to make principal and interest payments each month.
The third factor that could make a reverse mortgage ideal is when a homeowner has substantial equity. According to NRMLA’s RiskSpan Reverse Mortgage Market Index, homeowners 62 and older had $12.84 trillion in equity. However, many homeowners overlook that home equity is neither real nor tangible until it’s separated from the home either by a sale or taking a loan. Just because it’s there today doesn’t mean it will be there tomorrow.
“Consumers with few assets to leave to their heirs may want to avoid a reverse mortgage. Their heirs may be left with little to no equity and very few options to keep the property”, says Michelle White, mortgage expert at The CE Shop. While this may be true, most older homeowners don’t want to be a financial burden on their children. And if their children are unable or unwilling to assist what’s the homeowner’s Plan B?
The fourth situation when a reverse mortgage may be suitable is when a retiree wants to postpone tapping into their retirement savings or delay Social Security benefits.
While such strategies may reduce taxes and boost future Social Security payments retirees should seek the advice of a qualified financial professional who can help them weigh the costs, benefits, and risks of postponing Social Security.
In conclusion, older Americans are facing modern problems. These problems require modern solutions not rooted in the retirement trends of yesteryear but based on the brave new world older Americans face today. Yes, modern problems require modern solutions and a reverse mortgage could be just that for many.
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