With more retirees than ever choosing to age in place, the idea of selling your home to downsize may no longer be part of your plans.
That’s smart, because you don’t have to sell the homestead to produce retirement income and help cover the costs associated with a critical health crisis, or just the effects of aging that require outside care.
In the New York Times article The High-Class Problem That Comes With Home Equity, author Ron Lieber, the NYT’s Your Money columnist, suggests that reverse mortgages could be a good product for some retirees who want to tap the equity in their home without selling. We agree, and the Go2Income planning method can now incorporate a reverse mortgage.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
I have found that lifetime income, liquidity for unplanned expenses, lower taxes and a financial legacy are the objectives most retirees seek. When they also want to stay in their homes or age in place, I propose that annuities and home equity, added to traditional savings and investments, will best meet their retirement goals.
In our previous article, The (R)evolution of Retirement Income Planning, we presented the advantages of a plan based on investments, annuities and a home equity conversion mortgage, or HECM. Let’s dig deeper into that plan for our sample investor. You’ll see the key elements and how they can be customized to your personal objectives.
Sally’s case
Sally, 70, is focused on starting income. She has $1.5 million in savings (50% in a rollover IRA account) and $1 million in the value of her house (without any mortgage). She understands that with income annuities added to her plans, she can be a little more aggressive and wants starting income of $96,000 a year — translating to 6.4% of her retirement savings, or 60% higher than the 4% rule. (Together with her $62,000 in Social Security benefits and pension, she’s up to $158,000 in starting income.)
The following charts tell her story.
The first is her sources of income chart with Go2Income split into three sources:
- Investment portfolios: Dividends and interest from personal (after-tax) savings, RMDs and withdrawals from her rollover IRA account
- Annuities: Single-premium immediate annuity that provides lifetime annuity payments generated from personal (after-tax) savings for tax efficiency
- Home Equity2Income (H2I): HECM drawdowns until 85; QLAC lifetime annuity payments less HECM interest after 85
The product elements are allocated to accounts based in part on tax efficiency, and for Sally’s plan, less than 40% of the first-year income is taxable, with over $92,500 of the $96,000 becoming her spendable income. Also, a very large percentage of income is safe, meaning she doesn’t have to liquidate securities to realize the cash flow. Nearly 60% is safe over her lifetime.
The second chart is her projected liquidity, which may be the biggest surprise, with liquid funds to cover planned and unplanned expenses, like long-term care, modifying the house for aging-in-place necessities, etc. These funds are made up of the following:
- Investment portfolios: High-dividend portfolio (personal savings), fixed income portfolio (personal savings) and balanced portfolio (rollover IRA account)
- Home Equity2Income: HECM net line of credit
This plan meets Sally’s objectives for lifetime income, but also provides substantial liquidity for late-in-life spending — both planned and unplanned.
A reminder of the world before the evolution of retirement
It wasn’t so long ago when almost all retirees could be comfortable with income from Social Security benefits, savings and perhaps a pension or an IRA.
For most of us, pensions are now unattainable. Happily, Social Security is designed to be lifetime income, and if you worked 40 years and paid into the program, it will provide a good chunk of safe income. Your savings also might provide significant income, but investments in stocks and bonds can vary from year to year. In our prior article, we showed how each product element improved the results, in terms of income, liquidity, taxes and safety.
Another application of H2I
It doesn’t appear that we will ever go back to the days when we could retire without thinking too much about the income that we knew would flow in each month from a pension and Social Security. The (R)evolution of Retirement article, however, provides the information to help you make the decisions required by today’s environment.
When I was running the product area of a life insurance company, I knew that customers liked the lifetime protection of annuities. But some didn’t want to give up access to their funds. Back then, I got a patent on something called the Income Manager, which enabled the annuitant to cash in future payments and get access to some funds. While I can’t violate the patent, there is a need there that might be fulfilled somewhat differently:
By combining an HECM with annuities in different proportions, consumers get lifetime income (although at lower levels than Sally chose) and still maintain a large portion of savings as liquid. The available line of credit from HECM nearly matches the premium for the annuity and thus maintains most of your liquidity while gaining the annuity’s lifetime protection. We’ll explain in more detail in the next article.
Visit Go2Income Personal Planning to start a plan risk-free. You can ask one of our analysts to help you make adjustments. And then decide whether you want the peace of mind that lifetime income and greater liquidity can provide.
Related Content
- Is Your Retirement Solution Hiding in Plain Sight?
- How to Cut Your Taxes as Short-Term Interest Rates Come Down
- For Longevity Protection, Consider a QLAC
- How a Fixed Index Annuity Can Manage Retirement Income Risks
- Retirees: Worry Less About Markets, Long-Term Care and Taxes
-
Dow Adds 646 Points, Hits New Highs: Stock Market TodayIt was "boom" for the Dow but "bust" for the Nasdaq following a December Fed meeting that was less hawkish than expected.
-
5 Types of Gifts the IRS Won’t Tax: Even If They’re BigGift Tax Several categories of gifts don’t count toward annual gift tax limits. Here's what you need to know.
-
The 'Scrooge' Strategy: How to Turn Your Old Junk Into a Tax DeductionTax Deductions We break down the IRS rules for non-cash charitable contributions. Plus, here's a handy checklist before you donate to charity this year.
-
I'm a Tax Attorney: These Are the Year-End Tax Moves You Can't Afford to MissDon't miss out on this prime time to maximize contributions to your retirement accounts, do Roth conversions and capture investment gains.
-
I'm an Investment Adviser: This Is the Tax Diversification Strategy You Need for Your Retirement IncomeSpreading savings across three "tax buckets" — pretax, Roth and taxable — can help give retirees the flexibility to control when and how much taxes they pay.
-
Could an Annuity Be Your Retirement Safety Net? 4 Key ConsiderationsMore people are considering annuities to achieve tax-deferred growth and guaranteed income, but deciding if they are right for you depends on these key factors.
-
I'm a Financial Pro: Older Taxpayers Really Won't Want to Miss Out on This Hefty (Temporary) Tax BreakIf you're age 65 or older, you can claim a "bonus" tax deduction of up to $6,000 through 2028 that can be stacked on top of other deductions.
-
Meet the World's Unluckiest — Not to Mention Entitled — Porch PirateThis teen swiped a booby-trapped package that showered him with glitter, and then he hurt his wrist while fleeing. This is why no lawyer will represent him.
-
Smart Business: How Community Engagement Can Help Fuel GrowthAs a financial professional, you can strengthen your brand while making a difference in your community. See how these pros turned community spirit into growth.
-
In 2026, the Human Touch Will Be the Differentiator for Financial AdvisersAdvisers who leverage innovative technology to streamline tasks and combat a talent shortage can then prioritize the irreplaceable human touch and empathy.
-
How Financial Advisers Can Deliver a True Family Office ExperienceThe family office model is no longer just for the ultra-wealthy. Advisory firms will need to ensure they have the talent and the tech to serve their clients.
