Jane, a 72-year-old retiree, shared her experience: “I’ve seen my grocery bills go up by almost $100 a month, and filling up my car is costing me a lot more than it used to. It’s been tough to keep up with these rising costs on a fixed income” (source: Senior Living Blog). Over the past few years, the cost of living has increased significantly, impacting seniors’ financial well-being often causing retirees to begin drawing from their accounts earlier than planned. According to the U.S. Bureau of Labor Statistics, grocery prices have surged by 10.5% from January 2020 to January 2023. Nationally, gas prices have also seen substantial hikes, with the average price per gallon rising from $2.60 in January 2020 to $3.70 in January 2023, a staggering 42% increase. Overall, the Consumer Price Index (CPI) indicates a 6.5% increase in the cost of living from 2020 to 2023.
The Growing Challenge of Credit Card Debt Among Seniors
Recent studies have shown a troubling rise in credit card delinquency rates among senior citizens. Factors contributing to this trend include rising medical costs, insufficient retirement savings, and increasing living expenses. For seniors without enough income, much of the burden from inflation has been moved to high-interest credit card debt, which can be overwhelming, leading to financial instability and stress. As of February 2024, the average credit card interest rate in the U.S. was 22.63%, according to the Federal Reserve.
Growth over the last 10 years
Over the past decade, the average annual return on 401(k) plans has been approximately 7%, based on a diversified portfolio of stocks and bonds. Retirees that have to withdraw early from their retirement accounts miss out on a potentially substantial return. At the same time, home values in California have also seen significant growth, averaging around 5% annually. The proposed reverse mortgage loan strategy allows a qualified retiree to access the growth of their home equity.
A Better Option
Given these rising costs, seniors may feel tempted to carry credit card balances or to draw early from their 401(k) or IRA investments to cover day-to-day expenses. However, this approach can have significant drawbacks:
- Loss of Compounding Growth: Withdrawals from retirement accounts can disrupt the compounding growth of these investments, reducing their long-term value.
- Tax Implications: Distributions from 401(k) or traditional IRA accounts are typically subject to income tax, potentially increasing the tax burden on seniors.
- Market Volatility: Relying on investment withdrawals exposes seniors to market volatility, which can lead to financial instability during economic downturns. *
*It is important to consult a financial advisor and/or tax advisor to discuss the above information.
The reverse mortgage (RM) first option may allow qualified seniors to prolong their potential returns with their financial investments and draw first from a reverse mortgage for necessary income. A RM provides a steady stream of income from the equity in the home rather than liquidating other investments. This may allow a qualified senior to preserve their retirement accounts.
Understanding Reverse Mortgages
A reverse mortgage (RM) is a loan available to homeowners aged 62 or older, allowing them to convert part of the equity in their homes into cash. Unlike a traditional mortgage where the homeowner makes payments to the lender, with a reverse mortgage, the lender makes payments to the homeowner. This can be in the form of a lump sum, monthly payments, or a line of credit. The homeowner must continue to keep home insurance, pay their property taxes and keep the home in proper repair.
Example Scenario – This is for information purposes only and similar results cannot be guaranteed
Consider Jane, a 70-year-old homeowner with a fully paid-off home valued at $400,000. Jane’s monthly expenses have increased significantly due to rising grocery and gas prices. If Jane were to draw $1,000 per month from her IRA to cover these expenses, she would not only deplete her retirement savings but also incur additional taxes.
Instead, by opting for reverse mortgage income first, Jane can receive monthly income from her loan proceeds, tax-free (consult your tax advisor). This income can help her cover her increased living costs while potentially preserving her IRA for future needs. Jane retains ownership of her home at closing and can continue living in it as she meets the loan obligations, such as maintaining the property and paying property taxes and insurance just like a traditional mortgage. Failure to meet loan obligations may result in foreclosure.
Conclusion
For senior homeowners facing the challenges of rising living costs and high credit card delinquency rates, a reverse mortgage can provide much-needed financial assistance. By leveraging home equity, qualified seniors can cover their expenses. Financial advisors should consider reverse mortgages as a viable option for enhancing their clients’ retirement plans. By taking proactive steps today, seniors may be able to pave the way for a more comfortable future. If you would like to look into accessing your home equity you may contact Robert Krepps rkrepps@hightechlending.com or toll-free at 877-567-7476.
Robert Krepps, NMLS #255191, at HighTechLending Inc. HighTechLending Inc, NMLS # 7147, is an Equal Housing Lender. Licensed by the Department of Financial Protection and Innovation under the California Residential Mortgage Lending Act.
Sources
- U.S. Bureau of Labor Statistics. “Consumer Price Index – January 2023.”
- American Automobile Association. “Gas Prices.” Link
- Senior Living Blog. “Impact of Rising Costs on Seniors.”
- Financial Advisor Magazine. “Average 401(k) Returns Over 10 Years.” Link
