Q Dear Rick:
After seeing a variety of commercials on reverse mortgages, I’ve done some research and I think I’m a candidate. I’ve had a few conversations with different companies but before I sit down with the company I’ve chosen, I wanted to get your opinion as to my situation and whether you think I should use a reverse mortgage or not. I am 63 years old and I lost my job at the end of last year. I have a severance package that goes for another few months. I’m deciding whether I should just retire or look for another job. I am confident that I can get another job. My house is paid off; I have about $350,000 between my IRA and 401(k). I figure that if I took Social Security now and did the reverse mortgage, that money along with my retirement money should be sufficient. I’m figuring a four percent withdrawal rate on my money. What do you think I should do, retire or not?
A Dear Keith:
First, I want to congratulate you on doing some research about reverse mortgages before you even thought of contacting a company; job well done.
In reviewing your situation, I think it would be a mistake to retire. My reasoning is based upon a number of issues. The first deals with the four percent withdrawal rate.
Back in the 80’s, it became the norm that when financial advisors were analyzing whether someone could retire or not, they looked at four percent as the withdrawal rate. In other words, if someone had $100,000 for retirement, the safe way of withdrawal was $4,000/yr. That rule is the rule that many still apply today. Unfortunately, I do not believe it works today. Just think, back in the 80s, retirement was totally different than it is today. If nothing more, people are living substantially longer. Because people are living longer, the same withdrawal rate that they used in the 80’s is not necessarily appropriate for today. Another issue deals with rising costs. Back in the 80’s, yes we had inflation; however, today we face different types of increased cost of living. Back in the 80’s people didn’t have to worry about cell phones, cable TV and the internet. Those three items add substantial amounts to family expenses. In addition, we have to factor in that in the not-so-distant future there will be other types of changes that will no doubt cost us more.
In your particular situation, the reason I say that you should continue to work is that I believe you should give yourself a much greater cushion in retirement. If nothing more, by working for a few more years, you’re going to increase substantially your Social Security benefit. Furthermore, by delaying doing a reverse mortgage, you will actually be able to withdraw greater amounts out of the house than if you did it now. Lastly, by delaying retirement you will have the opportunity to continue to add to your retirement account and that portfolio will grow considerably. Therefore, I believe in your situation getting a job that would allow you to delay retirement for a number of years is a win, win, situation for you.
When it comes to determining whether you can afford to retire or not, one of the things you need to be sure of is that you have a cushion. If someone retires today it is not beyond the realm of possibility that they will be living 30 years from now. Life has changed dramatically over the last 30 years. What some people paid for houses 30 years ago, people are paying that much for cars today. I have no doubt that we will see the same types of changes over the next 30 years. Therefore, if you have the opportunity to delay retirement and give yourself that needed cushion in retirement, I think you should take it.