While you had each planned to work up until social security “normal retirement age”, you have just been notified (you are now 63) of an involuntary severance. The company will continue to pay your salary and benefits through the end of this year, you’ve learned. While your wife’s job seems secure, this is going to represent a massive cut in income, just when you were trying to beef up your savings after having helped one of your daughters through a crisis.

This is a second marriage for you, and you remain the sole owner of your home, which you have kept in fine shape, and which would have been totally paid for well before your planned retirement date. Fortunately, there are no pending maintenance issues or structural replacement needs, and you fully expect to continue living in that home for the foreseeable future.  A positive is that you are debt-free aside from the remaining mortgage payments on the home. Still not totally recovered from the shock of the job loss, you have already begun to look for alternate employment. Confident that you have four to five good years to offer a new employer, frankly, the prospect of being able to earn anywhere near your current income, much less with health insurance benefits included, appear dim.

You’ve described several very positive factors present in this admittedly negative – and all too common these days) situation – the continuation of salary and benefits through year-end, no consumer debt, a working spouse, and your own eagerness to find a way to continue generating income.  One path to consider is tapping into your “housing wealth” in the form of a reverse mortgage line of credit. There would be immediate relief in the sense that no monthly mortgage payment would be needed, so that the payments you would have made over the next few years might go towards your original plan of “beefing” up your retirement contributions.

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The two of you have actually been living apart for the past two years (you in the home you own jointly, she in an apartment in Kentucky). Now in your early seventies (she in her late sixties) you had hoped to keep the marriage together despite your difference. However, she has made clear in recent weeks that she plans to file for an “amicable” divorce. In the course of her moving, you had already divided up the furniture and office equipment and even separated the joint cash and investment accounts.

Your soon-to-be ex has pension income and has begun receiving Social Security benefits, so there has been no mention of either of you needing to support the other. Your home has been fully paid for since 2018, so there is no monthly budget pressure from that end for either of you, and, until now, she has never she has never asked to be compensated for her share of the equity. Now, however, although you would like to remain in the home, you might need to cash in retirement assets (generating a tax bill) in order to buy her out; you fear selling the home might be the most prudent way of raising sufficient capital.

One consideration might be funding the divorce settlement by using the housing asset itself through a reverse mortgage. In order for the lender to allow you immediate access to the equity in the property, your divorce would need to have been finalized, with a court decree ordering you to pay her a certain amount of money (based on an appraisal of the property). In fact, the reverse mortgage proceeds might not totally cover your payment to her; what it would accomplish is avoiding the need for you to cash in significant amounts from your retirement investments. Importantly, moving forward, you would have no obligation to make monthly payments on that mortgage. You would continue to be responsible for upkeep, insurance, taxes and HOA fees of course, but since reverse mortgages are non-recourse loans, both you and your heirs would be protected from ever being “upside down” (owing an amount greater than the value of the home itself).

The legalities would need to be dealt with in divorce court, but a reverse mortgage might well be the least painful path in handling the home ownership transition from two to one.

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With your tentative retirement scheduled for the end of this calendar year, you have been considering whether to begin claiming Social Security benefits at the start of retirement (you will have reached the age for full benefits). In the course of researching this topic, you found an article about the “Social Security bridge strategy” that explained that, if you can wait the three and a half years until you turn 70, your Social Security will then provide “a larger stream of annuitized income”. To tide you over until then, you’d draw down your 401K and other savings, (You can’t help feeling that the rate of increase in the Social Security benefit is likely to be greater than the rate you’d earn on savings right now!). 

One of the factors you’ve been considering in this decision is that you are in excellent health. On the other hand, while your home is entirely paid for, there are some important maintenance items coming up in the next year or two, including a new HVAC system. There may be some opportunities for part time work to supplement your income post retirement, but you’re reluctant to depend on having “gig” income.

Rather than depending on a combination of your investments and part time income to bridge the income gap you’d experience by deferring your Social Security benefit payments, you might consider using your own housing wealth. With a reverse mortgage set up as a home equity line of credit, you can fund the home repairs and have a source of income beginning when you retire next year, until you reach age 70 or even beyond.. So long as you keep up your property taxes and insurance, you will not need to make any monthly payments on the reverse mortgage..  Depending on the availability of “gig” income, you can adjust withdrawals as needed, allowing your 401K to continue “undisturbed” (thus reducing taxable income). Meanwhile, the unused portion of your reverse mortgage credit line will grow at the same rate as the interest being charged on the loan.

With a reverse mortgage, your own housing wealth becomes the “bridge” in the Social Security bridge strategy.

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After retiring in 2020, you had planned on leaving your 401(K) plan where it was in the company plan. Basically, satisfied with the investment options offered through that employer plan, you saw no reason to roll the money into an IRA. (Needless to say, your account was affected by the market downturn, but that would have been true no matter where the funds were held, you realize.)

Now, however, you have been advised by your CPA to convert the 401K into a Roth IRA.  While you would certainly take a big tax hit this year and next, she has explained, (she is advising you do the conversion in two stages), the assets will grow tax free after the conversion, with no need for you to take future distributions until and unless you choose to do so. In addition, your beneficiaries will not be paying tax when they, someday, take money out of the account. From a timing standpoint, you agree, precisely because the value of your account has fallen because of the stock market drop, the tax burden will be less now than it might be later on.

With your home in very good shape and mortgage-free, you have not needed to withdraw any money from the 401K. Your lifestyle needs have been more than satisfied through the combination of a life annuity, regular plus as-needed withdrawals from your own investment portfolio, and through fees from speaking engagements. In fact, you are hoping never to tap the 401K money, considering it a future legacy for your daughter and son. Still, should you someday need to make withdrawals from that account, the CPA points out, having made the Roth conversion could prove a blessing.

Rather than funding the tax bill out of the 401K account itself, an alternate strategy would be “tapping” your housing wealth in the form of a reverse mortgage set up as a line of credit. Since your vision of the 401K funds-turned-Roth is as a future legacy for your two children, the conversion of the account in its entirety (without diminishing its value by the amount of the conversion tax) will further that goal.

Since there will be no principal or interest payments due on a reverse mortgage, there will be no effect on any of your current or future sources of income. Any withdrawals you make out of the reverse line of credit (beginning with the cash needed to pay the tax on the Roth conversion and continuing for any draws you might take over the years) will be tax-free, with the unused portion of the credit line growing at the same rate as the interest being charged on the loan.

Through discussions with your tax advisor, you’ve come to understand the advantages of converting your 401K to a Roth IRA. Taking that a step forward, using the equity in your home to fund the conversion costs can help avoid taxation to you while enhancing your children’s potential legacy.

This is not tax advice. Please consult a tax adviser for your unique situation.

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Your parents, in their mid-seventies and now fully retired, are planning to relocate from Washington State to the Midwest to be closer to you and the now college-aged grandkids. The two of you have been helping them search for the perfect suburban home.

Expecting to clear close to $600,000 on the sale of their present home (even in the face of a recent slowdown in real estate sales), your parents were delighted to learn that they can probably purchase – and remodel to their liking – a comparable home for much less than West Coast pricing. They plan to put the excess profit aside towards possible future medical expenses and to fund a travel adventure.

A strategy you might discuss with your parents is a HECM for Purchase reverse mortgage.

Using about $400,000 of their $600,000 proceeds, they could purchase a $500,000 home here in Indiana. The required down payment is only $300,000 and the additional overfunding of the down payment by $100,000 would flow into a Line of Credit. That line of credit would become a growing, cash-like asset from which they could draw for travel, healthcare, or lifestyle needs.  Any unused balance will grow at the same rate as that being charged on the mortgage balance. 

With a reverse mortgage, your parents would be taking maximum advantage of the move to a more affordable part of the country, while enjoying maximum flexibility in putting their housing wealth to use.

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In advance of your daughters’ and grandkids’ upcoming Easter visit to Indiana from the West Coast, your oldest has mailed you a copy of the book Having the Talk, by Jack Tatar. The two of you, both retired and now in your late 70s, have experienced various health challenges, and the three girls are apparently concerned that you may not have done proper estate planning. Truth is, you have.  You’ve recently reviewed and updated your estate planning documents, even going so far as to pre-pay funeral and burial costs. However, you have not been in the practice of discussing your plans with your daughters or their partners. You will be glad to reassure them that you’ve assigned them secondary powers of attorney (concerning both healthcare and financial decisions). However, given that there are two of you, you’ve assumed that in the event one of you unable to function fully, the other would take over.

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Together you’ve made one very recent and important financial decision, which is to apply for a reverse mortgage on your home, with the idea of not only financing some improvements to the house and grounds, but also to have a source of emergency cash if and when needed as you “age in place”. Frankly, it had not occurred to you to share this decision with your daughters at this time. While you are unified in your resolve never to be a burden on your children, you value your autonomy and privacy.

In the course of arranging for the mortgage loan, you were happy to learn that after the second of you has died, or when you’ve been forced by illness to move), the girls as your heirs would have no responsibility for the deficit should the value of the home be less than the amount owing on the mortgage. On the other hand, should they decide to sell and the proceeds exceed the amount owed on the mortgage debt, they’d inherit the excess funds.

In a review of the book The Talk, the publisher mentions that, in addition to helping parents create a safe retirement, the content is meant to “provide adult children with the understanding they’ll need when considering their own retirement.”  Your daughters have shown bravery and love for you in broaching the sensitive subject, and actually, explaining your decision to tap your housing wealth would be a great way to kick off your family’s very own version of “the talk.”

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Now in your 70s, you’ve been giving thought to those looming required minimum distributions from IRA. Despite the recent dismal market performance, your rollover account is still over the seven-figure mark, and your accountant is actually recommending converting it to a Roth, either all at once or in two stages.

Since you still have passive business interests that generate income in addition to a pension, you are not in need of that IRA money to support your own lifestyle.  Your primary residence and a vacation home are both fully paid for, and your two adult children (the named beneficiaries of the account), are not in need of help right now. With no need to generate additional cash, you definitely do not relish the thought of being forced to make taxable RMD draws, much less making more than $160,000 in additional taxes on the conversion.

It might make sense to cover the tax bill using your own housing wealth in the form of a reverse mortgage.  That way, there would be no need to either cash in non-IRA investments nor to dilute the value of the IRA account itself. And, with no monthly principal or interest payments required, there would be no need to compromise your own lifestyle. If, once the Roth conversion is complete, you should choose to make some reverse mortgage payments, those would not only reduce the mortgage balance and minimize interest costs, but increase your available line of credit, which would grow at the same rate as that being charged on the mortgage balance.

By converting your IRA to a Roth, you’ve realized, you can sidestep those “looming” RMDs.the Managing your Roth conversion by deploying a now “dormant” source of funding can make the process a whole lot smoother and less disruptive to your ongoing investment goals.

Borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees. Please consult a tax advisor.

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03/06/23

With no training or expertise in finance, you have always liked to keep yourself informed by reading about the investment markets and the economy in general. The other day you came across a piece from Morningstar that seems to sum up your own situation: “retirees have run headlong into what retirement researchers call sequence risk, imperiling the portfolio’s ability to last over the whole of a typical retirement spending horizon…”

Divorced more than a decade ago, you retired from your nursing career at the height of the pandemic.  Now 68, you have been supplementing your income (Social Security and regular withdrawals from your retirement accounts) with part time medical billing work. You own your home, which is paid for and which is in good repair.

Generally speaking, you feel in control of your finances. At the same time, stock market losses have definitely affected the value of your retirement assets. While you enjoy your remote “gig” work, you do not want to have to return to direct patient care, and are concerned about the longevity of your investment accounts given your need for regular income.

An option to consider would be setting up a reverse mortgage line of credit using your housing wealth. During periods when your investment accounts might decline in value, you would partially or fully substitute withdrawals of your own home equity for withdrawals from investments.

In the Morningstar article you cited, two strategies mentioned for managing retirement income flow include “forgoing inflation increases and taking a 10% income reduction following a portfolio loss”. Withdrawals from your own housing assets would “pad” your income, making up for dollars you choose to “forgo” in terms of retirement pan withdrawals.

Your housing wealth can be used to “pad” income and “cushion” the effects of stock market volatility.

3/2/2023

The extended illnesses of several close friends have made you conscious of the burden their adult children are shouldering. You have estate planning documents; those were updated after you were widowed seven years ago, directing the disposition of your assets.  However, you’ve come to realize that more preparation is needed to prevent your becoming a financial and time burden on your own sons while you are still alive. You have executed powers of attorney, etc. but observing the many decisions hassles, and financial worries your friends’ children are shouldering, you are determined to take your own planning a step further, easing the load on your own children. Particularly since they both live at a distance and have work and family obligations of their own.

You would like, to the extent possible, to age in your own home, and have already begun making certain adaptations to the physical space to make it safer and accommodate possible infirmity. You are going to need a new heating/cooling system and, within a year or two, a new roof; you want to prefund these things so your sons won’t need to contribute anything. What has also become part of your thinking is prepaying your own funeral and burial expenses.

While you have resources sufficient to cover most, if not all, these expenditures. you would be substantially reducing your investment portfolio, which has already lost more than a fourth of its market value. Also under consideration for raising the necessary capital is selling a summer cottage you own in New England. With your wife gone, you have used this property less frequently. Neither of your sons has shown interest in owning that property, but you had hoped to continue hosting summer family gatherings there, health permitting.

As an alternative for tapping investments or letting go of the summer home, consider tapping the resources you’ve built up in your own home in the form of a reverse mortgage home equity line of credit. Initial withdrawals would go towards prepaying the funeral and burial costs; future withdrawals would be made as needed to cover the different stages of home improvement. 

It does not sound as if either of your sons would someday want to live in your home and, using that portion of your wealth to avoid burdening them might truly be a gift of love.

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