My husband and I are faced with a dilemma and we want your thoughts on it. My husband and I are both retired and are in our early 70s. My husband has a pension, which I will continue to get upon his death. We also both have Social Security, and we both have started taking our required minimum distribution from our IRAs. Our Social Security and my husband’s pension generally cover our living expenses, and we’re using our IRA money for travel. We are totally debt free and our house is currently worth about $250,000. If it wasn’t for our traveling, Social Security and my husband’s pension would cover our living expenses. Our issue deals with our granddaughter. Our granddaughter has just started college and she’s had to take out loans for her education. My son has approached us about paying for our granddaughter’s college education. We only have one child and one grandchild, and we’d like to do what we can to help. Our son has recommended that we take out a reverse mortgage and use that money to pay for our granddaughter’s education. My husband and I have started reading about reverse mortgages, and I wanted to get your thoughts as to whether you think a reverse mortgage would work in our situation. You should know that between my husband and I we have about $75,000 in our IRAs and that’s pretty much our entire investment portfolio.
I believe that reverse mortgages are a tool that many seniors should use to improve the quality of their life. After all, a reverse mortgage allows a senior to tap into the equity of their home and at the same time, to remain in their home for as long as they choose. The key, as far as I’m concerned, for the senior, is to make sure that they are using the reverse mortgage proceeds appropriately. In the situation at hand, I question whether using the money for your granddaughter’s education is an appropriate use.
Obviously, grandparents always want to help their grandchildren, but that is really not the issue. The issue is are you putting yourself at risk by doing a reverse mortgage. As you mentioned in your letter, you and your husband are doing fine financially, and are enjoying your retirement. However, the issue I have is if you do the reverse mortgage are you giving up your cushion. It would not be beyond the realm of possibility for you and your husband to live at least another 20 years. One thing I can guarantee you is that if you are around 20 years from now, your cost will be significantly higher than they are today. In addition, I can also guarantee you that your pension and Social Security are not going to keep up with the increased cost of living. Therefore, somewhere in the not-to-distant future you may run into the situation that your cost exceeds your income. The equity in your house would provide you the cushion to cover your needs. On the other hand, if you did the reverse mortgage now and used the proceeds to pay for your granddaughter’s college education, if you find you need more resources in the future, you could have difficulties.
I know that, particularly grandparents, never like to say no to their grandchildren. However, in life occasionally you have to be selfish and this is one of those times.
As selfish as this may be, I believe when it comes to considering a reverse mortgage, for the great majority of people, they should only consider doing it if they’re going to use the money for themselves. I personally do not believe that someone should use a reverse mortgage for the benefit of others. Remember, your home can be an excellent cushion, and you have to be cautious before you use it.
One last note regarding reverse mortgages, for those of you who are considering one, the key is to make sure you understand how the reverse mortgage works and know ahead of time what you plan to do with the money. In addition, don’t let anyone talk you into a reverse mortgage; make sure it works for your individual situation.
Rick is a fee-only financial advisor. If you would like Rick to respond to your questions, please email him at Rick@bloomassetmanagement.com.