There is a lot of talk about aging, longevity, and the fear of running out of money. There are people at every corner that will advise you to save more money and to prepare for illness, care needs, and ultimately unexpected longevity. I personally don’t buy into saving an additional couple percent of your income, hiring the better advisor, or coming up with the ultimate annuity as the end all be all solution. While these items may incrementally have significance over time as part of an overall plan, we should not lose sight of basic planning and wise decisions that we can all make for ourselves today.
There is no doubt we are aging and people are living longer in general. When it comes to money and the fear of outliving our resources, the fear has never been more prevalent. Longevity is our friend and now clearly our potential financial enemy. Longevity, with the cost of living, potential illnesses, and unexpected care needs could wipe out a nest egg for most families. The question comes down to how do you plan for this developing new paradigm given you could live well beyond your resources.
The answer is that there is no perfect right answer that will allow you to mathematically plot out a genius chart to a solution. The best path is to position yourself in a conservative manner with a keen eye on controlling debt and managing your resources. If you live within your means and you establish a plan to allow all of your resources to work for you in tandem then you are in the best position to prosper. This includes utilizing your home equity.
Here are examples of the wrong path: Spend your liquid assets and draw down on your investments at will. Pressure your fixed income by living as you see fit and compensating for any short fall with debt. After you have spent all of your money you are left with debt and home equity. Then you finally take notice and seek a reverse mortgage as funds of last resort. This is a lousy short sighted plan or the equivalent of no plan at all. Better choices provides us much better options.
Now let’s simplify things and outline a four bucket strategy we can all understand. Here are your four buckets for retirees:
- Fixed Income
- Liquid Assets & Investments
- Home Equity
All four buckets can expand and contract or remain constant. Income can grow with minimal cost of living adjustments. Assets and investments may also experience growth depending on placement. Debt will decline as payments are made or grow if we seek additional credit. Home equity often grows with minimal market appreciation and the pay down of fully amortized mortgages over time. With a plan each bucket can have purpose and can be toggled to work with the other buckets over time as we chart our course to a secure retirement.
If our objective is to achieve financial security and address the risk of longevity each bucket category by themselves doesn’t have significance. A binary view will force us to utilize each bucket independently with little continuity between them. This is commonly how people run up debt by living beyond their means and eventually eliminating all buckets except the last remaining one that is often only income with Social Security. This is not recommended.
Instead, my suggested plan is to use all of your resources in tandem and seek balance between debt, income, and your assets including your home equity. A reverse mortgage can put you in a controlling position to help accomplish this plan and provide you unseen leverage with bucket number three. How, you ask? A reverse can pay off first mortgages and home equity lines thereby freeing up cash flow for living monthly. This will eliminate the forward debt payments on the mortgages and allow you significantly more financial flexibility each month. Your existing mortgage(s) are transformed into somewhat of a hybrid loan. You still have mortgage debt on your home with the new reverse mortgage that replaced your existing mortgage(s) but you no longer have monthly mortgage payments. This means that the mandatory payments that were traditionally required to support bucket number three can now be reallocated to living and thereby reduce the stress on the other three buckets. In other words, the introduction of a reverse mortgage should be to help prevent you from living beyond your means and turning to various forms of debt that will eat away at your monthly cash flow and put stress on the other buckets. A reverse mortgage could prove to be the instrument that provides you the financial balancing weight that allows you to address life’s unexpected turns and stay on course with multiple buckets.
In summary, does it take a life expert to suggest that we all have to begin by living within our means and managing our resources so they all work together in tandem? No matter how long you live if you live by these standards you will be in a better position. This is how the generation that went through the great depression lived and taught their families. If we don’t waste we in theory should never be without. Don’t allow longevity to perpetuate fear and insecurity of running out of money. There are no guarantees, but we do know that the more buckets we have working together the higher the likelihood that longevity will be our friend.
See our page titled "Reverse Mortgage as a Planning Tool" for more information.