60 KIPLINGER’S PERSONAL FINANCE^ 10/2019home-equity line of credit. The FHA
says lenders can charge an origination
fee equal to the greater of $2,500 or
2% of your home’s value (up to the first
$200,000), plus 1% of the amount over
$200,000, up to a cap of $6,000. You’ll
also be charged an up-front mortgage
insurance premium equal to 2% of
your home’s appraised value or the
FHA lending limit of $726,525, which-
ever is less. And you’ll have to pay third
parties for an appraisal, title search
and other services. You can pay for
some of these costs with the proceeds
from your loan, but that will reduce
the loan balance. Costs vary, so talk to
at least three lenders that offer reverse
mortgages, says Giordano.
Because of the up-front costs, it’s
rarely a good idea to take out a reverse
mortgage unless you expect to stay in
your home for at least five years. Re-
member, too, that the loan will come
due when the last surviving borrower
sells, leaves for more than 12 months
due to illness, or dies.
If your heirs want to keep the home,
they’ll need to pay off the loan first.
That may not sit well with children
who expect to inherit the family
homestead, so it’s a good idea to dis-
cuss your plans with them in advance.
Giordano doesn’t see this as a big bar-
rier to a standby reverse mortgage—
especially if it helps you preserve
other, more liquid assets. “Kids would
much rather split up a big fat portfolio
than try to decide how to split up the
house,” she says.
Yes, this new phase of life comes
with a lot of uncertainties. And fi-
nancial advisers say that many new
retirees often hold back on spending
because of all the unknown bills that
may await years down the line. But
Fidelity’s Bernhardt says these retir-
ees often discover a happy surprise.
“They actually find out that they
are in a pretty good spot. They are able
to be happy and enjoy retirement,” he
says. “It’s not quite as expensive as
they thought it was going to be.” ■you’ll have to use the proceeds from
your reverse mortgage to pay that off
first. You have plenty of f lexibility:
Funds left over can be taken as a
line of credit, a lump sum, monthly
payments or a combination of those
options. Even if there’s not a lot of
money left over, paying off your first
mortgage means you won’t have to
withdraw money to make mortgage
payments during a market downturn,
Giordano says. “A regular mortgage
that requires a monthly principal and
interest payment can be a real burden,
especially when the value of your
portfolio is under stress,” she says.The drawbacks. One of the biggest
downsides to reverse mortgages is the
up-front cost, which is significantly
higher than the cost of a traditionaldon’t tap. If interest rates increase—
and given current low rates, they are
almost guaranteed to move higher
eventually—your line of credit will
grow even faster, says Giordano.
You won’t have to pay back money
you tap as long as you remain in your
home, a comforting thought if you take
money during a bear market. A HECM
reverse mortgage is a “non-recourse”
loan, which means the amount you or
your heirs owe when the home is sold
will never exceed the value of the
home. For example, if your loan bal-
ance grows to $300,000 and your
home is sold for $220,000, you (or
your heirs) will never owe more than
$220,000. The Federal Housing Ad-
ministration insurance will reimburse
the lender for the difference.
If you have an existing mortgage,Another RecipeHow to Get More From a Smaller Pie
The Society of Actuaries and the Stanford Center on Longevity have developed a with-
drawal strategy geared for middle-income workers with less than $1 million in savings—
people who often don’t work with financial advisers. This Spend Safely in Retirement
Strategy relies on optimizing Social Security benefits, which ideally you would delay until
age 70. “That’s the cornerstone of the strategy,” says Steve Vernon, research scholar at
the Stanford Center on Longevity and author of Retirement Game-Changers.
Social Security retirement benefits can start as early as 62, but taking them that early
will reduce your monthly check by up to 30% compared with waiting until your full retire-
ment age (66½ for those turning 62 this year). And for every year you delay benefits past
your full retirement age, your benefit grows by 8%. Few retirees (only 4%) delay Social
Security until age 70, according to a new study that calculated that today’s retirees are
losing out on an average of $111,000 per household during retirement by claiming benefits
early (see “Rethinking Retirement,” Sept.).
Vernon acknowledges that it’s a challenge to get people to delay claiming. But Spend
Safely aims to get over this hurdle with a strategy to generate income in your sixties with-
out Social Security: Pull the amount from your portfolio each year that you would have
received from Social Security had you claimed benefits. (If you’re earning money from a
part-time job, that will reduce the amount you will need to pull out.) On top of that, with-
draw an amount at a rate modeled after the required minimum distributions that older
savers must take from tax-deferred accounts after age 70½. This Spend Safely rate starts
at 2.7% of the year-end portfolio balance at age 60 and gradually raises that to 3.6% at- Thereafter, you would use the RMD withdrawal rates published by the IRS.
Vernon says retirees can tweak this method, say, to boost their travel budget in the early
years, although that would mean reducing withdrawals later. One drawback: Annual with-
drawals will go up and down with the investment portfolio’s performance each year.
CONTACT THE AUTHORS AT [email protected].
RETIREMENT