Using your nest to help with your nest egg

Using your nest to help with your nest egg is becoming a more common way to round out a financial plan during retirement.

Even after the bursting of the housing bubble, the biggest financial asset many retirees have is their home. But because that money is tied up in the equity of the house, it's an investment that has been difficult to count on as a source of income.

Reverse mortgages have long been an option. However, until recently, they were the Wild West of retirement planning. High upfront costs, poor disclosure and dodgy sales pitches made them an option that many advisers avoided.

Now, with the introduction of reverse mortgages backed by the Federal Housing Administration in late 2010, more financial planners are adding them to their tool kit.

Primarily, they're using them as a way to provide a steady stream of tax-free income that can last the rest of a retiree's life. They can also be used as a way to provide a cushion against a big, but temporary, drop in the markets.

"Between Social Security and a reverse mortgage, for some people there might be enough money to cover their needs-based expenses," says Mark Cortazzo, senior partner at Macro Consulting Group, a financial advisory firm in Parsippany, N.J. "Then you can use a portfolio, or maybe a part-time job, to cover the 'wants.' "

While any financial-planning decision should be thought through, a reverse mortgage literally involves the roof over your head. Take the time to understand the implications of a reverse mortgage, the costs and the different options. "It's a tool…but it's something that people need to be careful with," says Mr. Cortazzo.

Borrowers need to be sure they will have enough money in future years to pay real-estate taxes and homeowners insurance, or otherwise face possible eviction. Married couples should be sure both names are on the mortgage to avoid a situation where after the death of the sole spouse named on the loan, the surviving spouse has to pay off the loan. And retirees should be wary of brokers pushing higher-fee reverse mortgages.

A reverse mortgage is essentially a loan that allows the owner of a house or condo to convert some of the equity in the property into cash. Such mortgages differ from a traditional loan in that the money doesn't need to be repaid until the home is sold or no longer used as a principal residence.

Another major difference is that there are no credit and income requirements. These mortgages can be set up to pay out all at once in a lump sum, on a monthly basis or as a line of credit. (Details can be found at the website of the Department of Housing and Urban Development. Go to hud.gov and search for "reverse mortgage.")

One of the quirks of reverse mortgages that makes them appealing for a financial plan is that when set up on a monthly basis, over a period of many years a homeowner could receive more money in payouts than the house is worth at the time of the loan.

Roberto Nascimento, director of reverse mortgages at Arlington Financial in Yonkers, N.Y., takes the example of a 66-year-old with a house valued at $340,000. After subtracting the closing costs on a low-cost, FHA-backed floating-rate reverse mortgage known as a "Saver," that retiree could get a loan for about $173,000, which translates into a monthly check of $1,006 for the rest of his or her life.

By age 86, the payouts would have totaled more than $240,000; after another decade, the total would be $360,000. A "standard" reverse mortgage, with higher closing costs, would pay out $414,000 over 30 years.

Financial planner Harold Evensky, in Coral Gables, Fla., is taking a different tack with reverse mortgages. He has long recommended retirees keep on hand enough cash to meet two years of expenses, thereby avoiding having to sell investments at depressed prices during a bear market to pay the bills.

Mr. Evensky says that with a reverse-mortgage line of credit known as an HECM Saver, that cash bucket can be reduced to just six months. When things get ugly in the market, the retiree taps the equity line. When markets improve, he or she can sell investments and repay the loan.

The credit line is permanent, and the retiree won't have to start paying back the loan right away. In addition, the amount available to borrow will increase over time.

Mr. Cortazzo, meanwhile, points to an example where a reverse mortgage is being used to help keep the mother of one of his clients in her house and pay for the in-home care she needs. Not only does the reverse mortgage keep her in her house, her sons won't have to incur tax penalties by dipping into their retirement accounts to help pay for her care.

They just give up the possible future benefit of proceeds from selling the house. "That's the sweet spot," says Mr. Cortazzo.

George Lagarde

ReverseMortgageLV.com

GLagarde@AllWestern.com