Podcast Episode #54 – Planning, Pensions & Companionship = Happy Retirement

I was asked this question the other day on my Youtube Channel:

“Where is YOUR income going to come from once YOU retire?”

I think the question was more a challenge rather one of curiosity because of the previous comments. But I proceeded to answer as I do here:

“I plan on having three sources of income in retirement:
1. Social Security
2. Reverse Mortgage
3. Roth Distributions (If needed)

And in that order.”

Then I asked the commentator if anything looked odd by my scenario. And as surely as the sun rises in the east, he/she said, “Reverse mortgage??? No thanks!”

What I was hoping the commentator would say looked odd was that my income combination of Reverse Mortgage, Social Security and Roth will be…TAX FREE!

You pay no tax on ANY of those individual income sources. Which means when they are combined together you still pay NO TAX.

But, as always, that wonderful aspect of my 3 bucket income plan gets overlooked because of the fear of reverse mortgages. Which is too bad because reverse mortgages should play a role in every retirement plan, especially if you are retiring WITH a mortgage in the first place!

According to the Federal Reserve Board’s “Survey of Consumer Finances” 45% of households between the age of 65-74 carry a mortgage. The AVERAGE value of those mortgages was $117k! (I don’t know what the median value was though. But let’s say it’s $100k for simplicity. That’s still a big debt to carry.)

Nearly a quarter of households age 75 or above carry a mortgage and that average debt is still $91k.

The rule of thumb is that it costs $500 a month in payments for every $100k in mortgage debt one has. So, for a 75 year old retiree with a $91k mortgage that is around $500k a month going out the door, each and every month.

The average household in retirement spends around $3800 a month…total. Thus that mortgage payment is a large, if not THE largest percentage of your outgoing cash flow. In fact, the article just cited looks at BLS statistics which claims the average retiree spends $1,322 a month on housing, or one third of their income is consumed by housing costs.

So, what’s the single easiest way to eliminate your mortgage without liquidating assets to do so??? Get a reverse mortgage! Use your equity to help fund your retirement. It’s literally that simple. And if fact, it gets even easier when you realize spending equity means NOT spending investments.

Thus, if leaving assets to your heirs is important would you rather leave a house that appreciates potentially at 3% a year, or investments that MAY appreciate double that?

If you’re not concerned about leaving any assets then the reverse mortgage is even better because you are literally spending down your net worth and will NEVER have to pay it back!.

I think Dave Ramsey and others really hurt people with their misguided takes on reverse mortgages. Dave Ramsey said explicitly they are ‘scams.” That level of ignorance from a well-respected commentator simply boggles my mind. (I did a video here where I tore into Dave’s mis-representation of reverse mortgages.)

Now, I am not here to sell you on reverse mortgages. Whatever works best for you is fine with me. But I am here to tell you that you should educate yourself on them before you simply dismiss them outright.

Here is the best book you can read on reverse mortgages. Wade Pfau is one of my favorite financial planning academics. And his book simply opened my eyes to the value a reverse mortgage can have for retirees. I imagine with will do the same for you as well.

In this episode I review an older article (2005) from Keith Bender and Natalia Jivan called “What Makes Retirees Happy”.

Now one might question why I’m using a nearly 20 year old article to discuss. Good question. The answer is because this was another seminal article, at least for me, as I began my career painting the picture of what works for retirees. And folks, it’s not wealth that makes people happy. Not by any stretch.

Yes, wealth can help. But there becomes a negative utility in having more wealth. That is a fancy economics term meaning the MORE you have of something the less you value it.

What do retirees value most? It’s having the choice to retire as opposed to being forced to. Also, having a guaranteed flow of income from pensions and annuities, not just Social Security, combined with an asset that can grow to provide a potential higher standard of living.

Lastly, it’s the ability to spend time with one’s spouse, or close friends.

Notice nothing states HOW much income one needs to be happy. In fact, there is no correlation with higher income levels and retirement well-being.

But having loved ones, guaranteed income to cover expenses and choices.  You get those three things, you’re going to be good to go.

Listen to learn more.

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