California homeowners are fortunate to be experiencing some of the highest home prices ever seen. Many clients have owned their home for a long time and have generated a lot of wealth from that investment.
Your home is a key part of your balance sheet and typically, the closer you get to retirement, the closer you are to having your home paid off (although that’s not always the case).
A way to turn one of your largest assets into retirement security
Once retired, your income – whether it’s from investments, Social Security, or a pension – most likely won’t generate the cash flow you had while working. The burden of a monthly mortgage payment can weigh down on your budget and affect your lifestyle in retirement. A Home Equity Conversion Mortgage (HECM), often referred to as a “Reverse Mortgage” can turn one of your biggest assets into a key contributor to your retirement security, by eliminating your monthly payments and allowing you to access the equity you’ve accumulated throughout ownership.
We find HECMs to be a great financial planning tool for retired clients, of any means, to manage both their expenses and their income. HECMs eliminate your monthly mortgage payment, leaving more disposable income for you. Another key benefit of a HECM is pulling from your home equity to subsidize your existing monthly cash flows in retirement. This is an important feature from both a tax- and investment-planning perspective.
Most retirement savings are pre-tax money, so when you withdraw from them, you have to pay the income taxes you’ve deferred. Depending on your income needs, you could pair your retirement income with withdrawals from your equity line to not only mitigate your tax burden on a year-to-year basis but also allow your retirement funds to grow during periods of economic and market growth. This reduces the performance drag on your investments from monthly withdrawals and tax liabilities.
Clarifying some misconceptions about HECMs
Why aren’t HECMs more prevalent? Often, it’s because clients think they will have nothing to leave behind for their loved ones. This is an understandable and common misconception. However, with a HECM you maintain ownership of the home’s title – i.e., you’re not signing anything away. Upon your death, heirs can assume ownership of your home, either by paying back the equity you’ve pulled from the house in cash, or by refinancing the property back into a traditional mortgage. In other words, this is a similar process as if you were to have retained a conventional mortgage on the property.
With a tax-efficient retirement income strategy, your heirs could have more liquid cash inheritance than they otherwise would have, which they can then use to assume ownership, thereby increasing the overall size of your legacy.
Please give us a call to discuss whether a reverse mortgage is a right fit for your financial plan. We’ll help you model your cash flows and balance sheet to find the right solution for you in retirement.