How Can A Reverse Mortgage Improve Your Retirement Plans?

If you're beginning to contemplate the nuts and bolts of your own retirement, you may be evaluating different strategies for stretching your wealth. One strategy you may not have considered is your ability to take out a reverse mortgage on your real estate in "your own backyard" better known as you home. Although you may associate reverse mortgages with elderly homeowners who have spent down their last dime, a reverse mortgage can be a valuable addition to the pre-tax wealth of any recent retiree -- particularly those who are planning to downsize in a few years. Read on to learn more about the various advantages a reverse mortgage can bring to your retirement plans.  

What are the different strategies into which a reverse mortgage can fit?

Personal finance is called "personal" for a reason -- the appetite for risk or need for stability varies dramatically from one person to the next. (In some cases, a large variance may be found even between spouses.) However, a reverse mortgage can fit into a variety of scenarios from low-risk to high.   

Avoiding capital gains taxes on real estate

If you sold your house today and realized a profit over the capital gains exclusion (currently $250,000 for a single or $500,000 for a married couple) you could owe a hefty tax bill next April 15. However, taking out a reverse mortgage can allow you to receive monthly income from your home's value without paying a dime in tax.

Although reverse mortgages can carry some fees, if the monthly amount you'll be receiving is enough to cover most monthly expenses, you may be able to fully finance your retirement through your home's value tax-free, rather than through 401(k)s or IRAs that can be subject to high tax rates upon withdrawal. This will allow you to pass on these accounts to your heirs -- and depending upon the estate laws in your state, your heirs may even be able to access this money without paying taxes themselves.

Allowing you to retire early

If you're in your 40s and 50s and looking at retirement, you may be stymied by your inability to access most retirement accounts without penalty until your late 50s and your inability to receive Social Security until your late 60s. Even if you can "afford" to retire, how are you expected to access your retirement funds during your 50s and early 60s? 

Although reverse mortgages are available only to homeowners age 62 and older, knowing in your 40s and 50s that this is an option can allow you more freedom to spend down other accounts earlier, using your home's equity to bring you from 62 to 67, when you can receive full Social Security retirement payments. This can also prevent you from being forced to take early Social Security benefits at 62, which can dramatically reduce the overall amount of Social Security benefits you'll receive in your lifetime.

Avoiding an inheritance battle

An unfortunate reality for many families is the existence of squabbling adult children or other relatives who may embark on a legal battle for "their" share of your estate's assets. By taking out a reverse mortgage on your home, you'll give yourself a steady stream of income that can't be diverted to other relatives.  This can also ensure that your home goes straight to your mortgage lender upon your death, without being passed along to heirs who might fight over who is entitled to keep or sell it. 

If you die relatively soon after obtaining a reverse mortgage, any excess proceeds after the sale of your home may be given to your estate -- but these funds are much more easily divided than a physical house.