Social Security monthly benefits payments are based on a lifetime benefit amount. The later one claims Social Security, the higher the monthly benefit received. Credit union members can use a reverse mortgage to defer claiming benefits and potentially double future monthly payments. The following illustration shows one possibility:
Bob and Mary — a 62-year-old married couple — decide to retire, work part time, and enjoy a new phase in their lives. Bob currently earns $80,000 a year; Mary earns $40,000. Their home, purchased in 1974 for $70,000 and paid off, is valued at $600,000.
Bob and Mary use an online calculator to determine Mary’s Social Security benefits ($1,124 a month; $13,484 per year) and decide she should claim her benefits. Bob uses the same calculator to determine his benefits, but he isn’t so sure he’s ready to claim them. Because of Bob’s income, he is entitled to a larger benefit amount. In fact, he could receive $1,645 a month — $19,743 per year — if he claims at age 62. Assuming annual COLA increases by the time Bob reaches 70, he would receive maximum benefits of $1,927.38 per month at age 70 ($23,128 per year).
Bob and Mary realize deferring Bob’s benefits until he reaches 70 would nearly double his annual Social Security income, taking it from $23,128 (at age 70, if claim started at age 62) to $40,712 (by claiming at age 70). Even if they wait until Bob is 66 to claim, they’d still increase his lifetime max benefits to $28,493 per year.
Fortunately, the couple has substantial home equity. They explore reverse mortgages and, after careful discussion and consideration, decide on a HECM Saver, withdrawing $19,743 annually for eight years to bridge the cash flow gap. And because reverse mortgage proceeds are tax-free, the money they withdraw is not affected by Bob’s part-time earnings. Additionally, they do not have to repay the loan until they sell the property or convey its title to someone else or until the last surviving borrower passes away (although other events might cause loan acceleration).
When Bob claims at 70, his lifetime benefits increase nearly $20,000 annually. And, at age 70, Mary suspends her individual benefits and claims as spouse under Bob so they may enjoy an increased level of income. They stop their reverse mortgage loan draw — with the loan at $195,600 — when Bob claims. They decide to pay the loan interest ($5,224) and mortgage insurance premium ($2,515) that accrued over the past eight years to earn the tax benefit of paying mortgage interest and insurance. Based on life expectancy tables from the Social Security Administration, Bob might live another 14 years and, during that time, enjoy an approximate lifetime total of $707,049 in pre-tax benefits (not including Mary’s spousal benefits) because he deferred claiming until age 70, as opposed to the approximate lifetime total $571,422 received from ages 62 through 84.
As you can see from this illustration, deferring Social Security benefits might increase the lifetime value of those benefits and might be an option depending on where one falls in the life expectancy tables. Funding retirement during the deferral period through use of a reverse mortgage loan provides a source of supplemental cash flow. Please remember, however, strategy deployment depends on the individual circumstances and no single financial strategy is right for everyone.
To learn more about strategic financial partnerships, attend the GFHEA Affinity webinar on April 5, 2011 at 10 a.m. (PST). To sign-up and for webinar access information, contact Robert Scott, National Director of Affinity & Correspondent Relations at (916)384-1902 or Robert.Scott@genworth.com or visit reversepartner.genworth.com.
FOR ADVISOR USE ONLY. NOT INTENDED FOR DISTRIBUTION TO THE PUBLIC. The preceding example and any calculations are hypothetical and for illustrative purposes only. We do not guarantee the applicability or accuracy in regard to a customer’s individual situation or circumstance. Information contained within this strategy is not intended to replace qualified, professional investment and/or tax advice. Reverse mortgages may not be appropriate for certain individuals and some restrictions may prevent a homeowner from obtaining a reverse mortgage loan. All reverse mortgage borrowers are required by the federal government to meet with HUD-approved counselors to determine loan suitability. Failure to pay property taxes, hazard insurance, or maintain the residential property can result in a loan default requiring immediate repayment of the loan balance or foreclosure. Interest, mortgage insurance and other fees will accrue annually until full loan repayment. ©2011 Genworth Financial, Inc. All rights reserved. Genworth Financial Home Equity Access, Inc. 10951 White Rock Road, Suite 200, Rancho Cordova, CA 95670. NMLS ID #3313, (800)218-1415 or (916)636-0183. For a complete list of licenses, please visit genworth.com/reverse/licenses.
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