Don’t throw mortgage into reverse
If you’re like many homeowners in this country, you probably saw your house appreciate in value quite a bit over the past few years. That’s the good news. The not-so-good news is that, during this same time period, your savings and net worth might have stagnated or fallen. What does this mean for you? It could mean that when you retire, you do what a lot of current retirees are doing: using the equity in their homes to fund a large portion of their retirement. And that is not a good thing.
Before looking at how retirees are tapping into their home equity, let’s review a few statistics from a recent survey by the Federal Reserve. (The survey, released in early 2006, covers the years from 2001-2004.)
• The typical American household’s net worth (assets minus debts) increased only slightly, from $91,700 to $93,100.
• The typical family’s savings (including retirement accounts) fell from almost $30,000 to just $23,000.
• The median value of homes rose from $131,000 to $161,000, a 22 percent jump.
By looking at these numbers, you can easily see the problem that many retirees are facing: too few liquid resources available to comfortably support themselves during their retirement years. Consequently, an increasing number of retirees are taking out “reverse mortgages.” This is a special kind of loan that enables borrowers to convert their home equity into cash, either through a line of credit or installment payments.
But if you ever decide to sell your home, you will have to pay back what you bor- rowed on your reverse mortgage. And if you were to die and leave the house to your children, they would have to pay back the loan.
Clearly, these are potentially big drawbacks to taking out a reverse mortgage. And that’s why, if you have many years to go until you retire, you’ll want to give yourself more options for boosting your retirement cash flow. Here are two to consider:
• “Max out” on your IRA each year. Put in the maximum allowable contribution to your Roth or traditional IRA each year. And fund your IRA as early as possible every year; the more time you have on your side, the greater your growth potential.
• Increase your 401(k) contributions with every raise. Each time you get an increase in salary, defer more money in your 401(k) or other employer-sponsored retirement plan. As you enter retirement, you may be able to boost your income by doing the following:
• Delay taking Social Security. You can begin collecting Social Security at age 62, but your monthly checks will be larger if you can wait until your full retirement age, which can be anywhere from 65 to 67.
• Purchase an immediate annuity. An immediate annuity works pretty much as its name suggests: You make a lump-sum payment to an insurance company, and you immediately start receiving an income stream, which can last the rest of your life. Make sure you purchase an annuity from a company that receives high ratings from one of the independent rating agencies.
You work hard for much of your life to own your home — so do whatever you can to keep it once you’ve retired.