Financial advisers often suggest that you delay taking Social Security until full or normal retirement age (FRA) if not later — to age 70.
And the reasons are many: You’ll get 100% of your primary insurance amount (PIA) if you wait to claim at FRA and, depending on your birth year, anywhere from 124% to 132% of your PIA if you wait until age 70; your surviving spouse will receive the highest possible benefit if you delay taking Social Security until FRA; and your monthly benefit will be higher after cost-of-living adjustments than if you had claimed before FRA.
But the delay oftentimes means finding income to make up the difference between what you would have received from Social Security — on average it’s about $1,369 per month now —- and you they need for living expenses.
In recent years, advisers have suggested that Americans do one, all, or some combination of the following to bridge the gap: work; draw money from taxable, tax-deferred or Roth accounts; and use a reverse mortgage.
The strategy to use a reverse mortgage to delay taking Social Security, however, has come under fire of late. In August, the Consumer Financial Protection Bureau (CFPB) issued a report that explored the tradeoffs of borrowing a reverse mortgage loan to delay claiming Social Security.
The CFPB found that, in general, “the reverse mortgage loan costs exceed the additional increase in Social Security that homeowners would receive in their lifetime by delaying Social Security benefits.”
For instance, the CFPB noted that those who use a reverse mortgage to delay taking Social Security “assume debt for the principal loan amount, as well as for interest, mortgage insurance premiums (MIP), and monthly servicing fees, which are added to the principal every month.” The CFPB also wrote that origination and closing costs are often added to the loan balance since most consumers choose to finance these costs using the reverse mortgage proceeds. Over time, the balance of the loan increases as a result of compounding interest and MIP, and fees, the CFPB wrote.
Furthermore, the CFPB wrote, using this strategy generally diminishes the home equity available to borrowers later in life. “As a result of the diminished equity, borrowers that seek to sell their homes after using this strategy may have limited options for moving to a new location or handling a financial shock,” the CFPB wrote.
Experts say the CFPB got some things right in its report, such as the risks associated with reverse mortgages. But experts took issue with the report’s methodology and assumptions, which might cause homeowners to unnecessarily dismiss reverse mortgages as a retirement-income tool worth considering.
So, how might you go about thinking about the use and value of a reverse mortgage as part of your retirement-income plan?
First, analyze. For many Americans, the equity in their home is their largest asset, says Marguerita Cheng, the chief executive officer of Blue Ocean Global Wealth. And that equity can be turned into income with a reverse mortgage.
But homeowners shouldn’t use a reverse mortgage to delay taking Social Security, or for any other reason, in the absence of a detailed analysis that addresses the trade-offs, risks and rewards.
“Future debt is a risk, but the risk has to be weighed with the reward of what is being created,” says John Salter, an associate professor at Texas Tech University. “There are no free lunches. But we should always have a comprehensive toolbox of strategies and we must find the right tool for each person.”
Cheng agrees that a reverse mortgage or a home equity conversion mortgage (HECM) might not be right for every person in every situation. But, she says, a reverse mortgage could help many widows and divorcees who often have lower Social Security benefits, lower 401(k) and IRA balances, and increased health care costs in retirement achieve a better outcome in retirement.
Manage longevity risk. Tom Davison, a partner emeritus with Summit Financial Strategies, says using a reverse mortgage to delay taking Social Security is primarily a risk reduction strategy rather than an income-maximization strategy. “As risk reduction, it does indeed maximize income, especially in the later years,” he says. “So, it does both, in the later years. And the ‘later years’ is the key. It pushes the most possible inflation-adjusted, tax-advantaged dollars into those years.Manage sequence-of-return risk. Retirement researchers increasingly say homeowners ought to consider a HECM with a line of credit to manage the risk of having to withdraw money from retirement during down markets. The researchers call withdrawing money from falling retirement account balances sequence-of-return risk.
“I’m a believer that, when possible, the HECM line of credit is the best planning tool around for risk management and for meeting goals,” says Salter. “But you would use it only ‘when needed.’”
When not to use reverse mortgage. “Everyone wants to age in place,” says Cheng. “But reverse mortgages don’t make sense if it’s not the right home to age in place. They also may not make sense if the house is too expensive to maintain.”
Robert Powell is editor of Retirement Weekly, contributes regularly to USA TODAY, The Wall Street Journal, TheStreet and MarketWatch. Got questions about money? Email Bob at [email protected]
Resources for consumers
• Learn more about reverse mortgages at consumerfinance.gov/ask-cfpb or contact a HUD-approved counselor at https://entp.hud.gov/idapp/html/hecm_agency_look.cfm, or by phone at 800.569.4287
• If you have a problem with a reverse mortgage, you can submit a complaint at consumerfinance.gov/complaint. They’ll forward your complaint to the company and work to get you a response — generally within 15 days.