You might want to get a reverse mortgage even if you don't need the money now
3 Strategic Uses for a Reverse Mortgage Line of Credit
by Cliff Auerswald
Like all loans, reverse mortgages come with several decisions around loan types, payment types, and other specifications. One of the biggest decisions around a reverse mortgage is how you would like to receive the loan proceeds. One very popular option is to access the loan funds through a line of credit. However, the reverse mortgage line of credit is different from a traditional home equity line of credit in some ways and can be used in many strategic ways to support your retirement plan.
Here are three strategic ways to use a reverse mortgage line of credit to boost your retirement position.
1. Supplement spending
You may have saved enough for your retirement years or you may not have saved enough, but in either case, you may encounter unforeseen expenses that challenge your finances. In your younger years, you most likely had a job to replenish your savings in the case of an emergency.
In retirement, you no longer have the option to work longer, or harder, to make up for unplanned expenses. A reverse mortgage line of credit can help as a back-up emergency fund. Keep in mind that if you choose the line of credit option, you can always leave the funds untouched until you actually need them. Also, for funds that are left unused in the line of credit, the accessible amount actually increases over time.
Halfway into retirement, you may decide you want to go on a cruise around the world and would rather not tap into your retirement savings accounts to pay for it. This could be a fun use for the line of credit.
On the other hand, a line of credit could be extremely useful if you encounter health problems in retirement that aren't covered under insurance. The line of credit could prevent a derailment in your retirement plan if health problems arise unexpectedly.
2. Expand portfolio longevity
Another way borrowers can use a reverse mortgage line of credit strategically is to help ensure they don't outlive their retirement portfolios. Whether your portfolio includes stocks, a 401(k) account or an independent retirement savings account, you may realize after a few years into retirement that it may not last you the rest of your life.
There are many factors that play into this, which is why pinpointing exactly how much money you need to save for retirement is tough. Age is one factor that plays a huge role. People are living longer each year, so retiring at 65 could realistically mean you need to have enough funds for 35 years if you live to be 100. The average American lifespan is expanding over time.
Inflation is also a huge component that may shorten the longevity of your portfolio. What you may think is enough to save at age 50 may be double or triple that amount in 30 years.
A reverse mortgage line of credit can be there if you have these realizations and it's too late to change your work strategy or saving plans. You may have been in ill health in your early 50's, but with modern medicine, you could now live to be 95. You have the option to tap into the line of credit to avoid draining what's left in your portfolio so that portfolio can continue to appreciate.
One of the most important ingredients for a comfortable retirement is to be debt free when you retire.
Will debt derail your retirement?
3. Buffer market volatility
A third way to utilize a line of credit is to buffer against the volatility of investment markets. As you have probably noticed, the stock market, even in the last 10 years, has experienced several dramatic shifts for better and worse. After the most recent economic downturn, many retirees panicked and sold prematurely. In your working years, it may have been easier to withstand market swings by holding investments longer-term, but in retirement, you don't usually have that kind of freedom if you are relying on your holdings to pay for day-to-day expenses.
If you take out a reverse mortgage line of credit, you have the option of tapping into it when the market is down, allowing you to let your investments ride out the wave rather than pulling everything out before you had planned to pull it out.
It's helpful to see the different scenarios, how they play out, and what the benefits might look like over time.
Reviewed October 2017
Cliff Auerswald is co-owner of All Reverse Mortgage. Visit their site for more information about a reverse mortgage line of credit and using a reverse mortgage for long term care. Don't forget to find out how much you could borrow using the reverse mortgage calculator.
Take the Next Step:
- Should you use a reverse mortgage for home maintenance?
- Get more answers to your reverse mortgage questions in the Dollar Stretcher Library.
- Find tools and resources geared specifically for the 50+ crowd in The Dollar Stretcher section dedicated to your financial issues. If you're over 50, your financial needs are different. And so are your questions.
- Subscribe to After 50 Finances. You've learned how to work smarter, not harder. This weekly newsletter is dedicated to people just like you. Subscribers get a FREE copy of our After 50 Finances Pre-Retirement Checklist, a list of everything you need to do to be ready for retirement.
Share your thoughts about this article with the editor.