SWR and reverse mortgages

[Ready]

Something I've been thinking about for a while as we debate whether a "safe" withdrawal rate should be 4/3/2%...For those of us who own our homes outright, and where the home value is a fairly substantial percentage of our total net worth, wouldn't it be reasonable to go for the 4% WR, knowing that if we do have a really bad sequence of returns, and the money runs out in say 20 or 25 years, when we were hoping for it to last more like 30-40 years, we could just do a reverse mortgage later in life to cover the difference?

I suppose it depends on whether you are trying to leave a sizable estate to heirs or charity. But if you are not, why not use the equity in your home as your safety net against the worst case scenario of a 4% or greater WR being too aggressive?

I would hate to cut back to 2-3% just to be safe, and then find out later in life that I didn't really need to, and a large chunk of my nest egg, plus my entire home, all goes to charity.

I'm not sure if others are in the same situation, but in my case my home value is about equal to my nest egg, so it's a sizable amount to just ignore in thinking about withdrawal rates.

 

[clifp]

I think that is a reasonable approach. In my case I view my home equity as a substitute for long term care coverage. My plan is to stay in my house for another 20 years assuming I stay single. Then use the proceeds to move in retirement community, which offers access to long term care. Right now I figure the house will provide the equivalent of 5 or 6 years in a nursing home, and I hope somebody gives me drugs if I have to spend more than that time in nursing home.

 

[Animorph]

It works fine as a Plan B or higher. Or sell the house and get a cheap rental. Costs seem to be an issue with reverse mortgages.

Another approach is to buy an SPIA before your portfolio dips too low. That gives you guaranteed income for life, but not much of an estate. The terms get better as you age.

 

[rayvt]

the money runs out in say 20 or 25 years, when we were hoping for it to last more like 30-40 years, we could just do a reverse mortgage later in life to cover the difference?

How confident are you that reverse mortgages will even exist 20-30 years from now?

 

[siamond]

I would tend to agree with the spirit of the post. Optimizing for the worst doesn't seem the way to go to me. Planning for the worst with sub-optimal yet realistic means (while living better in better-than-worst situations) does seem more like it.

And yes, many options with your house, reverse-mortgage (can't believe that would ever disappear), or sell & rent, or sell/buy-smaller, or sell/move-cheaper-area/buy, etc. Certainly a harsh decision when you're old, but that's part of the 'sub-optimal' aspect.

I find a little surprising that your house has the same value as your nest egg though. I'm shooting in the dark here, but this might mean that a bit of downsizing could be in order? Sooner than later? Which would in turn increase your nest egg, hence your annual withdrawals in absolute $$...

 

[donheff]

One issue with reverse mortgages is the impact if you later need assisted living. DW's parents started a reverse mortgage and two years later needed to move into an assisted living complex. Luckily they still had enough equity to sell and pay the substantial up front fee of the place they wanted to go. Had they been ten or more years down the reverse mortgage road they couldn't have afforded the place they liked. If you can stay in your home until you die all is good but that is a mater of luck.

 

[FIRE'd@51]

Like Clifp, I view the equity in my home as something that could be tapped by either DW or myself should one of us require a nursing home. The other could then continue to live in the house with the same WR as we now have, while the reverse mortgage (taken as a lump sum) would pay for several years of the nursing home. This would avoid the hassle of selling and moving. The portfolio would then be available to support the other in a nursing home should that be necessary down the road.

 

[audreyh1]

Of course I don't know what your needs are, or how far you are from retirement, but having a house worth the same as your nest egg implies to me that either house downsizing should be considered or the nest egg has a lot of growing to do.

I suspect reverse mortgages aren't very efficient, and like the example above, it may not be realistic to expect to live there until you die. You may need some of the equity available for a long-term-care facility.

 

[Ready]

Thanks for the feedback everyone.

My nest egg and home are each at $2.5M. I quit full time work in May, and am only doing some part time work now to bring in enough to cover my expenses. I need about $50K to live on, so that would only be a 2% WR. But, I'd rather know that I could spend the full 4% and do some extra traveling, and maybe do some home renovating, and other things that I have been putting off, and not worry about whether it is safe to do so.

All of my nest egg is invested in the traditional stock/bond index funds, but no REITS. So I figure that by having this much money in my home, I get some good diversification in case both the stock and bond markets tank, but real estate continues to do well.

If a reverse mortgage is not feasible later in life, then yes, I could just sell and down size. But I think the market will continue to do well in my neighborhood, so I'm not sure it makes sense to sell any time soon. We really like where we live.

 

[Gatordoc50]

I hope that it's a reasonable approach because it's what we are doing. The difficulty is in trying to predict the value of your home in 20 or so years.

 

[meekie]

Reverse mortgages do depend on the current value of the house, so if you need the money in the middle of a real estate dip, you could end up with not a great deal (happened to an aunt of mine).
But, I do think using the equity in your home for later needs/plan B is an excellent idea, especially with as much equity as you have.
If I were in your shoes, I would be using 3.5-4% for the next handful of years, and keep re-evaluating. In 10 years, I think you'll have a better idea if scaling back to 2-3% or using some of your equity would be a good idea.

 

[Gill]

I need about $50K to live on...

Do you really live on $50,000 with a $2.5 million house? I would think the taxes. insurance, and maintenance alone would cost $50,000.
Bruce

 

[Ready]

Do you really live on $50,000 with a $2.5 million house? I would think the taxes. insurance, and maintenance alone would cost $50,000.
Bruce

Our homeownership costs have been very low. CA Prop 13 has capped our tax increase at 2%, and our assessed value dates back to 13 years ago when we bought the land and built it. Utilities run about $200/month, insurance adds another $100/month. Maintenance has been very low. Our back yard is an alley, and our front yard is the size of a postage stamp. The house takes up the entire lot, so there is little lawn care or watering to be done. The value is all due to it being ocean front property.

We never would have bought a $2.5M home. We bought the land 13 years ago for less than $400K, and built the home ourselves. All in we spent less than $1M. During the real estate boom it actually peaked at $3.5M, then went down to $2.2M at the low. So it's really only come back about 10% from the recent bottom.

All in all, we just got very lucky when we bought the land at just the right time. I think because it's ocean front property, and there are only about 20 single family homes in the city with similar views/locations, the day will come when real estate here will be hot again and the price will get bid up. Since I don't see us needing the money in the next 30 years or so, I like the idea of keeping our investment in the house as a diversification from stocks and bonds. And of course, it's a great place to live. We never need heat or air conditioning because the temperature is always so moderate.

 

[rodi]

Do you really live on $50,000 with a $2.5 million house? I would think the taxes. insurance, and maintenance alone would cost $50,000.
Bruce

Value does not equal price paid. As Ready mentioned - Prop 13 caps the tax rate.

My house is less expensive - but still around $800k. We didn't pay that. Our taxes are low because we bought a long time ago. Insurance covers the cost of rebuilding, not rebuying. So it also doesn't reflect the market price. The land/dirt is the value.


To the OP - we fully count our house as plan B or C. We chose not to get LTC insurance because there's no mechanism to prevent them from jacking up the rates, but we can always downsize (for the community spouse) and pay for many years of nursing home coverage.

 

[Ready]

Rodi,


All good points. And I love San Diego! What an amazing place to live.

I have to agree with your concerns on LTC. You buy in at a certain price, yet they can raise the rates any time they feel like it, and if you don't agree to the increases, you generally lose everything you have invested so far. I've often wondered why so many people recommend LTC under these circumstances. It seems like a license to rip people off.

 

[Htown Harry]

Here are a couple of articles relevant to this discussion.

Tighter Rules for Reverse Mortgages - Wall Street Journal - WSJ.com

Regulators plan to merge the two types of reverse mortgages on the market today: the “standard” loan, which currently allows borrowers to tap from 56% to 75% of a home’s appraised value, depending on their age, and the “saver” loan, which currently pays from 4 to 16 percentage points less. The agency has yet to announce the new limit.

Going forward, most homeowners will be able to borrow less than they currently can with a “standard,” but more than they can with a “saver,”...Regulators also plan to cap the amount many borrowers can tap during a loan’s first year.

This one emphasizes the importance of married couples executing a power of attorney (and obtaining a statement of competency at that time) well before the need for tapping into the home equity might arise.

Obstacles mount for reverse-mortgage seekers - Encore - MarketWatch

The problem arises, he explains, when one spouse has dementia. Because California is a so-called community property state, reverse mortgage lenders require both spouses to sign the loan documents. But when one spouse has been diagnosed with dementia, that person cannot execute a legal contract.

Lenders will accept a power of attorney, a legal document that appoints one person to act on behalf of another. But they frequently seek proof that a person with dementia was competent when he or she signed the Power of Attorney.

That’s where things can get complicated, says Weinstein, because some people don’t generate such proof at the time. Weinstein recommends asking doctors, family, friends, or the attorney who drafted the power of attorney to furnish proof – typically in the form of a statement.

 

[2B]

I've always believed that anyone thinking of getting a reverse morgage can't afford their house and it's time to downsize. Anyone interested in a reverse mortgage has probably spent the bulk of their assets and is now in a critical financial situation. Getting a reverse mortgage is that last grasp at trying to stay in their home. When the reverse mortgage money is gone or becomes inadequate, the party ends and no resources are left. Whether it be LTC or something else, the well is now dry.

 

[rayvt]

Yup, that happened to my brother-in-law. He maxed out his reverse mortgage a couple of years before he died. Sad times.

 

[W2R]

How confident are you that reverse mortgages will even exist 20-30 years from now?

+1

I can't imagine actually planning to survive on the proceeds from a reverse mortgage, or even thinking of getting one at all except as an act of complete desperation, as a last ditch emergency measure. I suppose it is in the back of my mind but only as one of a number of possibilities for a very grim situation in very old age, and I cannot assume that they would even be available at that time.

 

[annienz]

Well, here's my tentative plan (which I'm sure has been discussed before but as I'm new, not sure where.)

We have seven rental properties plus our own home. Nil mortgages on three properties. Income from rent after all expenses, around $45k.

Should we ever need to top up our income, we plan to borrow against the house. Even at $500pw, the additional interest payable is easily covered by increasing rents on the other properties. I don't plan on taking anywhere near that but it's an option.

I know this is considered a debt-ridden strategy, but the option is always to simply sell one or two properties to pay down debt in the future.

Any thoughts on this at all? I know it's do-able - the bank don't care, so long as we pay the interest.

 

[donothing]

r.m.

From what little I know about reverse mortgages plans like "do a reverse mortgage to pay for a nursing home" would not work. The reverse mortgage becomes due and payable 6 months after the borrower leaves the house or dies. In other words, as soon as you leave the house you have 6 months maximum before they take it, unless you or your heirs can pay it off.
I would consider a r.m. on one of my rental properties but no can do.