Assume your clients are a 65-year-old married couple with a $500,000 retirement portfolio and a home valued at $250,000. Using the 4% rule, they could safely withdraw $20,000 per year initially, increased by the rate of inflation each year, and have a reasonable chance of not running out of money over the course of a 30-year retirement.
Adding a reverse mortgage to their retirement income plan could improve their odds.
If your clients established a line of credit, they would be able to borrow $127,435 based on their age, home value and interest rates. The initial interest rate is 4.265% (which is variable); it is a combination of the monthly Federal Housing Administration mortgage insurance premium (1.25%), lender margin (2.5% in this example) and the monthly Libor rate. If left untouched, the line of credit would grow to:
• $193,500 in 10 years
• $293,800 in 20 years
• $446,100 in 30 years
Interest rates are variable and could increase, meaning the cost of borrowing could rise, but so could the growth rate of the line of credit. A line of credit could be used for ongoing emergencies, as a source of cash during market downturns or as a pool of funds to use after other investment assets are depleted, said John Salter, associate professor of personal financial planning at Texas Tech, who created the example.
(Related read: The reverse mortgage grows up)
Alternatively, the couple could take annual payments of $8,065 for the life of the loan, paid monthly. Added to their annual withdrawals of $20,000 from their retirement account, the couple would increase their initial cash flow by 40%, to $28,065 per year.
Online extra: Test your knowledge of reverse mortgages with the quiz at
www.financialexpertsnetwork.com.
