In the first essay, John, a 62-year-old contemplating retirement, decided to spend his IRA and leave his home equity intact. In the scenario below, John chooses to tap into his home equity before accessing the higher-yielding investment (the IRA). This move potentially provides him with more assets on which to live during the retirement years.
Scenario Two: Tap Home Equity First
John takes out a reverse mortgage loan at age 62, withdrawing $20,000 in tax-free loan proceeds per year for eight years. His IRA grows at a presumed annual rate of return of 6% during that time — allowing the account to increase in value from $200,000 to $318,770. When he turns 70, the reverse mortgage loan balance is $205,976, including $5,300 in interest and $2,200 in Mortgage Insurance Premium (MIP). John stops his withdrawals from the loan and pays MIP and interest — essentially freezing the loan balance. He begins to draw $27,500 from his IRA, satisfying Required Minimum Distribution (RMD) and allowing him sufficient cash flow to pay down the loan balance and continue his lifestyle.
At age 88, the net asset value of John’s home and the remaining balance of the IRA equals approximately $555,961. (Home value calculations in this illustration assume an annual 2% home price appreciation. IRA appreciation is calculated at a 0% rate of inflation and a 6% annual rate of return. Total net asset value at death of borrower reflects full repayment of the reverse mortgage loan at or prior to time of death.) Thus, John has improved his net equity situation in Scenario Two over the net equity value of $464,680 reflected in Scenario One.
The “Money Available to Spend” Perspective
In Scenario One, John withdraws approximately $300,000 from his IRA (15 years at $20,000/year). He receives roughly $220,000 from his loan (11 years at $20,000/year, not including MIP and interest). The money available to spend from age 62 to 88 is $520,000.
In Scenario Two, John draws $160,000 from the home loan first (eight years at $20,000/year, not including MIP and interest). He then taps his IRA, taking $495,000 in distributions from age 70 to 88 (18 years at $27,500/year). During the 26-year period, he potentially has spendable income of $650,000. Subtract from that the interest expense of $129,000, and he is provided a total net of $521,000.
Including the tax savings for the interest and MIP expenses could, for higher tax-bracket situations, allow the overall net amount shown in Scenario Two to produce more actual spendable income than in Scenario One.
The net asset value/age perspective
(Amount reflects full repayment of reverse mortgage loan at age 70)
As you can see from these illustrations, reverse mortgage loan proceeds might help balance retirement lifestyle cash flow needs while maintaining overall net asset value. Strategy employment, however, depends upon the individual circumstances of the client. No one strategy is right for everyone.
To learn more about strategic financial partnerships, contact Robert Scott, National Director of Affinity & Correspondent Relations at (916)384-1902 or Robert.Scott@genworth.com or contact Tom Werder, National Director, Strategic Partnerships, at (916)384-1874 or Tom.Werder@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.