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Check out Part 3: Scenarios for using a Reverse Mortgage Before or After Retirement.

Let’s now look into several of the myriad ways to use a reverse in retirement income planning. There are more. YOU will create more.

1. Social Security Income planning: Remember a few years ago when CFPB Director Richard Cordray (Ohio) disparaged the idea of using a reverse to extend Social security enrollments and used false information to show it? and the ENTIRE Financial Planning world descended upon him like a plague of rabid locusts? Yeah. That was cool. VERY cool.

This requires (as does virtually all uses of the Reverse HELoC) setting it up as soon as the Client reaches mutual eligibility (both Spouses 62+) This works best with a Mortgage value under 35-40%. The HECM HELOC relieves the Client of mortgage payments. Simultaneously, the Planner calculates how much income is generated if the file at 62 or wait to 70 (or any other desired age). Call the Lender and ask how much equity could be invested into a Tenure or term payout for that amount of time. Clients live on tax free equity until they reach age of SSI implementation. Since the loan is non recourse, they may forget about paying it back, or transfer assets against the debt to pay it DOWN (not “off”), or combination of both.

2. Emergency fund planning: Pre-retirement urges an emergency fund of 3-5 months of non-discretionary expenses (NDE). After retirement, they urge up to 2 years of NDE. This funded sum allows the Borrower to weather down markets and allow the portfolio to recover vs. withdrawing finds from a damaged portfolio and damaging it further. Instead of dumping those funds into a dead interest account, put it in the Reverse and pay down the debt (never pay it off), or if the balance is adequate, simply turn the account savings over to investments for current or future income or insurance needs. The main point is the Retirees can work on accumulating wealth for investment purposes instead of a non-productive emergency fund, and simply initiate the HELOC to fulfill that need in one simple move while re-purposing the existing funds back into the portfolio. While Life insurance, Roth accounts, HSA accounts, etc. may also be used? The Reverse HELOC strategy is the superior choice for Home owning Borrowers (especially) those who prefer to age in place.

3. 2033 SSI benefit reduction: In 2033, HHS has suggested there won’t be enough money for retirement. By establishing the HECM HELOC at age 62, given 13 yrs to grow, the Client can convert equity from their HELOC into Tenure income payments in the year 2033 that once started, are guaranteed to last for the time they remain in the home, or for the rest of their lives. If neither spouse can occupy the home? Then the loan call is enacted.
The advantage of this is (unlike annuity stream payouts), it stops. The home equity use ends, and the value passing to Heirs is vastly improved. Unlike SPIA’s, unused equity is not absorbed by the annuity company. It is returned to the equity reserve account of the program.

4. Medicaid asset protection: When initiating the HECM in any of the (above) scenarios, it is important to structure the loan the (ahem) “REVERSE” of a conventional mortgage. IOW, the best solution for creating future value is to increase the margin of the loan to create a larger mortgage interest growth. This “debt” may then be used to support future transfers of account wealth to “pay down the mortgage” (which is a legal allowance by Medicaid). The larger the negative amortized debt? The greater the capacity to protect account balances from Spend down rules. Once the Spouse passes on or recovers? The funds may be repatriated back into the investments, and with some modifications, the portfolio may be resumed. Due to the HELOC liquidity features, and Medicaid rules for checking account balances? Care must be taken to prevent recapture of those assets.

5. Income stream substitution: It is very likely that portfolio returns may be superior to HELOC growth. Simply begin structuring the HELOC equity into tenure payments and allow additional years for portfolio growth without being used for income, or reduce the income by the amount received from tenure.

6. Mortgage interest/payment arbitrage: We’ve been shown how to be frugal with expenses and using “active shares” to improve growth rates by a point or two over time to squeeze the full value out of every component (literally, “everything but the squeal”). The most inefficient and common waste of time and equity is the standard mortgage payment. Typically, a mortgage payment is ONLY 25-40% P to I, the money thrown away that could be recaptured and used due to the Non-Recourse features of a Reverse HELOC are breathtaking. Perspective: “If I offered you an investment that took say 40 cents of every dollar for meaningless and useless expenses? Would you buy it or recommend it for your Clients? No, you wouldn’t. But we seem to be “ok” with doing the same thing with a mortgage payment…Simply structure your reverse HELOC as soon as possible after 62, and continue dollar cost averaging (DCA) the same exact mortgage payment into what ever risk tolerance investment you have available.

In a fraction of the time, the NAV of the sinking fund will equal or exceed the reverse mortgage balance. Think about this…a $2,500/month mortgage payment that is $500/mo principal pay-down and $2,000/mo interest is an incredible $24,000/year loss; and an 80% loss of capital per month, multiplied by the number of remaining payments! Even with a graded amortization, it is such a huge upfront loss of purchasing power, it literally cannot be overcome. To NOT recommend the Reverse HELOC could be construed as a substantial legal exposure against the Planner. Every Client with a mortgage should be directed immediately to this superior alternative.

At that point, the Client has multiple choices for the funded account:

a. Pay off (or pay down to $1,000.00) the Reverse balance for the benefit of the Heirs to acquire a home without debt”
b. Convert some, part, or all of it to income, or invest back into the portfolio, or pay down mortgage debt to rebuild or strengthen HELOC growth for future years in retirement
c. Buy SPWL and transfer the wealth on death without strings attached
d. Buy other income producing assets, real estate, precious metals, etc.
ANYTHING that you can do is better than continuing the mandatory mortgage payment structure of a pre-retirement mortgage.

7. Traditional-Roth Conversion: The Reverse HELOC can provide financing for a Traditional IRA to Roth Conversion. Simply set up the HECM HELOC and then effect the transfer. Use a draw from the HELOC to pay the IRS taxes. The non-recourse feature of the HECM HELOC eliminates any (customary) mandatory payment. The equity added to the annual HELOC growth rate will ultimately neutralize the borrowed sum. Funds from future value may be used to repay the sum borrowed, or not. It becomes the unexpected and pleasant choice of the Client.

8. Expense shifting: Set up the Reverse HELoC as soon as possible to begin the HELoC equity account growth. Calculate the sum of new equity annually. Shift the surplus to other expenses (property taxes, insurances, etc.) This frees up income for more important issues like life fulfillment, goals, objectives, legacy building, etc.

 

-For Retiree’s living in Hawaii Kai, Kaneohe, Waikiki, Ewa Beach, Honolulu, Wapahu, Pearl City, Kailua, Mililani, Manoa, Hilo, Kapole’i Kailua-Kona, Waikoloa Village, Honoka’a, Mountain View