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Home-equity conversion mortgages

Let’s look at a hypothetical example of how a home-equity conversion mortgage (HECM) could be used to help you increase your retirement income and be sure to leave a legacy to your heirs. Mr. Moon is 70 and Mrs. Moon is 68 years old. They are in very good health and have been retired for almost fifteen 15. When they retired, their pension was more than enough to cover all of their living expenses. 

During the last 15 years, they have seen their medical costs rise substantially, their property taxes increase, and the cost of living increase, which has eaten away at their modest retirement savings. So now they are feeling an income pinch. Mr. Moon is considering going back to work, and they have been taking aggressive steps to cut their expenses. In fact, they are driving a car that is 20 years old, they have canceled their cable television, and they are considering not taking all of their prescriptions to try and save a few extra dollars.

Before Mr. and Mrs. Moon retired, they had paid off their home. Their home is by far their largest asset, and if they had to sell it today, they could probably sell it for $300,000. They think selling their home would free up the capital they would need to live more comfortably. So they start looking to downsize. Unfortunately, what they find is that even the smaller decent homes in nice neighborhoods are going for around $300,000, so they will only break even. They do not want to move into an apartment; in fact, they don’t want to move at all. They have lived in the same home for more than 30 years, and they have a lot of wonderful memories, an incredible garden, great neighbors, and they are comfortable.

When I talked with Mr. and Mrs. Moon, I asked them whether they had ever considered using a HECM. They said yes, but they didn’t like it because they have two children, and it was important for them to leave something to the kids. I asked whether the kids would want to live in the home. They said no, the kids would probably sell it and split the proceeds. Leaving a financial legacy to their children was important to them, but leaving the home to the children was not as important. So I asked them this question, “How much would you like to leave to each of your children?” After a little discussion, they came up with $100,000 for each child.

At our second appointment, I asked the Moons whether they would be interested in a solution that would increase their income by about $700 per month and also guarantee that each of their children would receive a $100,000 inheritance. There was no hesitation and an emphatic YES.

For this particular couple, we were able to use a HECM to generate a guaranteed income stream of $1,000 per month for the rest of their lives as long as they lived in their home. From that $1,000, we used $302.14 to buy a second-to-die guaranteed universal life insurance contract that would pay an income-tax-free death benefit of $200,000 upon the death of the second spouse, with each child listed as a beneficiary at 50 percent each or $100,000 for each of their two children. The guaranteed death benefit was to age 110, so it is highly unlikely they would outlive the insurance contract. This leaves them with $697.86 per month to make ends meet.

Now as with any planning, advantages and disadvantages exist, and you should consider all of the different what-ifs, costs, and risks. While this type of planning is certainly not appropriate for everyone, it obviously accomplished the desired goals for Mr. and Mrs. Moon and might also be an option for others who have paid off their home, but are now at risk of losing their retirement lifestyle due to lack of retirement income. Please consult a licensed professional before making any changes to your financial plans.



• Jason Parker is the president of Parker Financial LLC, a fee-based registered investment advisory firm working primarily in wealth management for retirees. His office is located in Silverdale. Follow his blog at www.soundretirementplanning.com. 

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