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Will a Reverse Mortgage Help or Hurt Your Financial Plan in Retirement? - YouTube
Channel: See the Forest Through the Trees
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creating tax-free income in retirement could聽
be as important as ever in the coming decades聽聽
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in my opinion as the bill comes due on the massive聽
amount of borrowing to fund the spending needs of聽聽
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our government tax rates have only one direction聽
to go and that is up taking steps to prepare for聽聽
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the future is smart and that's why in this video聽
I'll explain why a reverse mortgage could be a聽聽
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crucial part of a financial plan in the right聽
situations reverse mortgages allow Americans聽聽
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62 and over to borrow money against the equity in聽
their home with no obligation to repay it as long聽聽
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as they live there because you are tapping聽
home equity the proceeds come tax free to聽聽
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the borrower once the home sells the lender is聽
paid back in full from the proceeds of the home聽聽
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are you a candidate to add a reverse mortgage聽
to your financial plan stick with me as i聽聽
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explain part 8 of my series creating a聽
100 tax-free income stream in retirement聽聽
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this video is about how reverse mortgages can聽
deliver a tax-free income stream potentially聽聽
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increase your net worth keep social security from聽
being taxed and avoid IRMA surcharges on medicare
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Colin Exelby will be here and i provide聽
financial planning for business owners and聽聽
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their families that just makes sense i own聽
the financial advisory practice celestial聽聽
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wealth management and provide advice virtually聽
to clients all over the country reverse mortgages聽聽
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what are they why are they important to a聽
financial plan who do they make sense for and what聽聽
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to look out for you keep watching we're going to聽
discuss these now if you are watching this video聽聽
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i know you are researching ways to maximize聽
your after-tax retirement income and net worth聽聽
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in this video i want to provide you聽
with the knowledge to know whether you聽聽
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are a good candidate for a reverse mortgage this聽
is a good spot to point out important disclosures聽聽
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the information in this video is for educational聽
purposes this is not specific financial planning聽聽
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or investment advice in addition everyone's tax聽
situation is different you should discuss your聽聽
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tax situation with a qualified tax advisor聽
before implementing any planning strategy聽聽
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first what is a reverse mortgage a reverse聽
mortgage is a type of loan that's designed聽聽
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to give people age 62 or over access to the equity聽
that they've built up in their primary residence聽聽
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without having to sell it to be clear you can聽
only get a reverse mortgage on the home you聽聽
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are living in unlike a regular mortgage in which聽
the homeowner makes payments to the lender with a聽聽
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reverse mortgage the lender pays the homeowner聽
now you have the option to receive a lump sum聽聽
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a line of credit or a series of payments over聽
time but you don't have to pay the loan back聽聽
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you can if you choose to do so it's nice to聽
have that flexibility you'll hear that word聽聽
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a lot the loan balance accumulates interest over聽
time similar to any other mortgage at the stated聽聽
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rate on the loan and we will talk about how聽
that impacts the financial plan in a little bit聽聽
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the key part to understand is that the loan聽
must be repaid when the borrower dies moves out聽聽
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or sells the home and that's just like any other聽
mortgage reverse mortgages are often called home聽聽
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equity conversion mortgages or HECM for short聽
and they're administered and regulated by the聽聽
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U.S. department of housing and urban development聽
or HUD as many people know it it's a great way聽聽
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to provide flexibility to a retirement plan since聽
the distributions are alone of your own home聽聽
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equity guess what they are not included in your聽
adjusted gross income reported on your tax return聽聽
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you know what that means that means they don't聽
count as provisional income they don't trigger聽聽
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high income Medicare premiums or the taxation聽
of social security benefits huge government聽聽
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insurance is required and is provided through the聽
federal housing administration or FHA they're also聽聽
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a part of HUD this backstop provides critical聽
assurances to both the borrower and the lender聽聽
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insurance foreign HECM reverse mortgage guarantees聽
the borrower funds if the lender goes out of聽聽
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business and it ensures the borrower will never聽
owe more than the value of the home when sold聽聽
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let me say that again since that is really聽
important if the housing market declines聽聽
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the borrower will never owe more than the home is聽
worth when it is sold the borrower gets what is in聽聽
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effect a tax-free advance on their equity in the聽
form of a line of credit fixed monthly payments聽聽
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or a lump sum but the borrower must also聽
continue to pay the real estate taxes聽聽
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homeowners insurance and the cost to maintain the聽
home just like any other mortgage all right so why聽聽
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reverse mortgages important to a financial plan聽
one word flexibility when you reach what i call聽聽
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the retirement red zone the five years before聽
retirement and the five years after retirement聽聽
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you're in a very important zone for the success of聽
your retirement plan the ability to tap different聽聽
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assets to pay for retirement living expenses聽
in a tax efficient manner increases the success聽聽
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rate of your financial plan for many retirees a聽
good portion of the retirement assets are sucked聽聽
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away in tax deferred retirement accounts like聽
traditional 401ks and IRAs i just talked with聽聽
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someone today about this over 90 percent of their聽
assets are in these traditional 401ks and IRAs聽聽
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guess what these assets have likely never been聽
taxed so what happens when you go to withdraw聽聽
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them well when they're withdrawn they're taxed at聽
income rates and they contribute to provisional聽聽
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income that can make social security taxable and聽
increase your Medicare premiums as retirees get聽聽
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close to and start drawing on these assets the聽
last thing that you want to see is a significant聽聽
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market downturn like what happened in 2000 to聽
2003 or 2007 to 2009 you probably remember those聽聽
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periods well or at least saw your parents deal聽
with them of course there is no way to predict聽聽
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if or when a major stock market decline will聽
occur why is this so important to avoid in聽聽
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your retirement red zone well if stocks decline聽
significantly and you're forced to sell them low聽聽
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because you need funds to live you lose the聽
ability to wait out their eventual rebound聽聽
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for that reason having an ability to access other聽
assets like a reverse mortgage can help reduce the聽聽
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chance of running out of retirement funds early in聽
essence if markets were down and you had access to聽聽
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a reverse mortgage you could potentially use those聽
funds tax-free remember until the stock market聽聽
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recovers and then tap the retirement accounts you聽
could even elect to tap those accounts and pay聽聽
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back the home equity you took out if you wanted聽
to there's nothing in a reverse mortgage that says聽聽
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you can't a second reason reverse mortgages can be聽
so important to a retirement plan has to do with聽聽
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the taxes and surcharges these are what i like to聽
call stealth taxes because they creep up on you聽聽
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without realizing it in previous videos in this聽
series we talked about the changes to the current聽聽
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tax brackets and the chances the tax rates rise聽
significantly from here currently there are two聽聽
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significant jumps in the tax bracket at certain聽
income levels from 12 up to 22 percent and from 24聽聽
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up to 32 percent if your social security pension聽
or other income each year comes to the middle of a聽聽
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tax bracket and retirement account withdrawals聽
would push you into a higher tax bracket聽聽
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it can be beneficial to use assets like a roth IRA聽
and a roth 401k or home equity through a reverse聽聽
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mortgage to keep your income out of those higher聽
brackets paying loan interest can be a lot less聽聽
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than paying significantly higher taxes聽
from creeping into a higher tax bracket聽聽
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this is where sophisticated retirement income聽
planning can potentially save you taxes at 22聽聽
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percent 32 percent or even more earlier i聽
mentioned IRMA and i'll be releasing a video聽聽
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shortly explaining IRMA in more detail basically聽
IRMA is the medicare income surcharge for 2022聽聽
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individuals with income over 91 000 a year聽
and married couples with income over 182聽聽
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000 a year pay a surcharge that's added to their聽
medicare part b and part d premiums you can see聽聽
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those additional monthly charges here and if聽
your income is higher you will pay even more聽聽
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this is also harder to plan for because聽
the surcharge is based on your magi income聽聽
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from two years ago if you are in these brackets聽
either because of significant investment income聽聽
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retirement distributions pension income or rental聽
income keeping your income below these levels can聽聽
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not only save you money on taxes but also on聽
medicare premiums additionally later on in life聽聽
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it's most likely that if you're a married聽
couple one of you will outlive the other聽聽
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but you will still have similar income similar聽
expenses and similar assets the surviving spouse聽聽
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will be assessed what i call the widow's penalty聽
remember in earlier videos when i jokingly said聽聽
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to get married well there are just a ton of聽
benefits on the tax side for married couples聽聽
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probably also on the emotional side the widowed聽
spouses will now most likely be in the single聽聽
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tax bracket for the rest of their life unless they聽
remarry that means potentially higher income taxes聽聽
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capital gains taxes and IRMA surcharges because聽
you move from married filing jointly to single聽聽
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the reverse mortgage can be a huge benefit to聽
the widowed spouse to keep their income down聽聽
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and avoid IRMA surcharges who do reverse mortgages聽
make sense for all right now that we know many of聽聽
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the advantages of reverse mortgages let's聽
discuss who they are most appropriate for聽聽
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actually the better way to answer this question聽
is to outline who they are not for if this is not聽聽
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your primary residence you cannot get a reverse聽
mortgage second if you are not yet 62 years old聽聽
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you cannot apply for a reverse mortgage and third聽
if you believe you're going to sell your home in聽聽
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the near future to move somewhere or downsize聽
i think a reverse mortgage on your current home聽聽
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may not be the best option because of the costs聽
involved so who do they make sense for ideally聽聽
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they make sense for someone who plans to stay聽
in their home for the rest of their life and is聽聽
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looking for flexible ways to access tax-free cash聽
in retirement first if you're single as i said you聽聽
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must be over the age of 62 to qualify if you're聽
married only one of you must be over the age of 62聽聽
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but all borrowing qualifications will be based聽
on the younger spouse's age that's important if聽聽
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you have a wide age difference between the two聽
of you if you're married it is mandatory that聽聽
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both of you are listed on the loan but that's聽
also good for financial planning purposes now聽聽
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many times people think that using home equity is聽
the last place you should go for retirement funds聽聽
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i am here to challenge that thinking i talk a聽
lot about flexibility in my financial planning聽聽
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videos and that's because we don't know聽
what financial markets will do in the future聽聽
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what unexpected health scares we will have what聽
tax rates will be or what the world will have in聽聽
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store for us who thought we would have a pandemic聽
not many people so proactively creating access聽聽
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to various assets allows us to customize聽
where we get funds in retirement and when聽聽
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this can potentially lower taxes significantly聽
in retirement and can allow you to avoid having聽聽
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to sell stocks to live on during a downturn even聽
CNBC personality and PBS host Suzie Orman recently聽聽
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said on her show that accessing a reverse mortgage聽
is often a better option than selling stocks when聽聽
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they've declined or paying capital gains taxes聽
well duh that seems to make a lot of sense to me聽聽
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all right now that we know who a reverse mortgage聽
candidate is let's fast forward a minute what聽聽
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happens when a reverse mortgage borrower does聽
pass away after a borrower passes away the heirs聽聽
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take over the responsibility of repaying the聽
reverse mortgage balance typically heirs simply聽聽
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sell the house and use the proceeds to repay it聽
proceeds from the sale of the home will always聽聽
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cover the entire repayment amount even if the loan聽
balance is higher than the sale price of the home聽聽
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as a non-recourse loan no other assets of errors聽
can be taken by lenders to repay the reverse聽聽
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mortgage that is huge and an often overlooked聽
part of financial planning now while most heirs聽聽
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plan to sell their parents homes if the heirs聽
prefer to keep the home as an inheritance they聽聽
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only have to repay 95 percent of the loan that's聽
a nice advantage alright so what to look out for聽聽
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number one watch out for pushy salespeople聽
recommending a reverse mortgage without really聽聽
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knowing your financial situation if it sounds like聽
they're selling a reverse mortgage to anyone with聽聽
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a pulse run as fast as you can the other direction聽
work with a knowledgeable financial planner聽聽
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who knows your situation number two scrutinize聽
the cost of the loan so you know what they are聽聽
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but don't dwell on them i've seen a number of聽
misinformed people talk about the high borrowing聽聽
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costs of a reverse mortgage as a reason not to聽
pursue them well as with any loan there is an聽聽
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underwriting process to determine if the borrower聽
has the financial means to pay for the loan聽聽
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traditional mortgage loans are known to have聽
mandatory closing costs and fees and reverse聽聽
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mortgages are no different both loans require聽
expenses and closing costs and since reverse聽聽
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and traditional mortgage closing costs聽
include many of the same types of fees聽聽
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the overall expenses are often very comparable聽
what is the major difference the major difference聽聽
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is that reverse mortgage borrowers will often聽
need to pay insurance on the loan to the FHA聽聽
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this is what backs the loan if housing prices聽
don't keep up with the loan value in my opinion聽聽
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it's a small price to pay for the peace of mind聽
of not owing more than the home is worth when聽聽
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it's sold now that you know all about reverse聽
mortgages and their tax-free income benefits just聽聽
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click here for the next video in the series how to聽
create a 100 tax free income stream in retirement聽聽
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if you want to start from the beginning of the聽
series just click this video get clear be clear
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