Annuitizing the home

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bobbyrx
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Annuitizing the home

Post by bobbyrx » Thu Sep 16, 2010 1:49 pm

I think that most of us have a well-deserved aversion to reverse mortgages with the exception of elderly folks who have depleted their nest eggs and wish to spend last years in their current home.
I have a different situation and would appreciate comments.
We are retired and are currently living comfortably on a 2.5% withdrawal rate from a very conservative 20% equity- 80% fixed portfolio. We are planning to move to a similar size house in an amenity filled community near our children. We will be selling our house and paying cash for a considerably more expensive one. After that, we would need to reboot our initial SWR to 4.25%- in red territory for a conservative portfolio and we might forgo some discretionary purchases. I am thinking of buying the new home for cash and reverse mortgaging to obtain @$1,400K/month. I am thinking of this as a form of asset allocation since the new house would be over 40% of our total net worth.
Thanks for any replies.

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Re: Annuitizing the home

Post by Mel Lindauer » Thu Sep 16, 2010 1:59 pm

bobbyrx wrote:I think that most of us have a well-deserved aversion to reverse mortgages with the exception of elderly folks who have depleted their nest eggs and wish to spend last years in their current home.
I have a different situation and would appreciate comments.
We are retired and are currently living comfortably on a 2.5% withdrawal rate from a very conservative 20% equity- 80% fixed portfolio. We are planning to move to a similar size house in an amenity filled community near our children. We will be selling our house and paying cash for a considerably more expensive one. After that, we would need to reboot our initial SWR to 4.25%- in red territory for a conservative portfolio and we might forgo some discretionary purchases. I am thinking of buying the new home for cash and reverse mortgaging to obtain @$1,400K/month. I am thinking of this as a form of asset allocation since the new house would be over 40% of our total net worth.
Thanks for any replies.
Hi Bobby:

Other than the high up-front costs and the fact that you may not leave any equity in the house to your heirs, I don't see anything wrong your plan.

(I assume you considered a conventional mortgage with today's low rates?)
Best Regards - Mel | | Semper Fi

heyyou
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Low diversification

Post by heyyou » Thu Sep 16, 2010 2:30 pm

Is there any concern about the low diversification of having 40% of your net worth in one immobile asset, even if the numbers work out?

What if your kids need to move elsewhere? Hurricane Katrina permanently dispersed some families from NOLA and there are fewer jobs in Phoenix now for the adult children of Sun City residents.

With low mortgage rates, can you wait a while before the reverse mortgage just to see how well you like the new place, not just the house but the neighborhood and the lifestyle?

Could you please fix the income number? I can't imagine 1400K income per month.

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bobbyrx
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Post by bobbyrx » Thu Sep 16, 2010 2:42 pm

Thanks for replies Mel and Heyyou

I did not want a conventional mortgage because the interest deduction would be mostly wasted since I presently come in at top of 15% bracket and take standard deduction I probably would wait a year before acting but I am very familiar with new location and kids seem firmly planted (daughter is tenured professor). In any event, I wouldn't follow them again.
And yes, there would be less house equity for estate but that's OK because there probably will be some nest egg + some house equity unless we outlive our LTC insurance. But in that case, a less plump house value would be better anyway against Medicaid seizure.
The HECM reverse mortgage calculator did indicate a monthly $1,375 for a $625K house. Hope that is correct.

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Post by stlrick » Thu Sep 16, 2010 4:10 pm

Have you compared your plan with making the smallest possible down payment and putting the difference into a single premium immediate annuity? Might the SPIA payment both cover the mortgage payment and give you greater monthly left over income than you will get from the reverse mortgage?

Rick

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Taylor Larimore
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A difficult decision.

Post by Taylor Larimore » Thu Sep 16, 2010 4:31 pm

Hi Bobby:

You did not give your ages, but a 4 1/2% portfolio withdrawal rate should be relatively safe for 30 years even if you pay cash for your home. As you age your safe withdrawal increases.

On the other hand, interest rates are very low, and instead of investing the cash in your new home, you might take out a mortgage and invest the cash in one or two Single Premium Immediate Annuities (SPIAs). Any excess income could go to the children while alive instead of a fully-paid house they may not want after you've gone.

It is what we decided to do.

Your nursing home policy removes the need to have large home equity or ready cash for unforseen health expenses.

Something to consider.
"Simplicity is the master key to financial success." -- Jack Bogle

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Post by pkcrafter » Thu Sep 16, 2010 9:08 pm

bobby wrote:
I am thinking of buying the new home for cash and reverse mortgaging to obtain @$1,400K/month. I am thinking of this as a form of asset allocation since the new house would be over 40% of our total net worth.

As Taylor said, your age is an important factor in this decision. However, regardless of age, your solution seems a bit convoluted to me.

The issue isn't totally about tax deductions, it's about the best way to make the home purchase and still maintain a safe withdrawal. I would consider a 4.25% WDR safe unless you are under 62. This is an excellent time to get a low interest rate mortgage, and that seems to be a very viable choice if you insist on getting the WDR down below 4%. Using all cash to buy and then getting it back via a reverse mortgage is unnecessarily complex and expensive.


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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bobbyrx
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Post by bobbyrx » Thu Sep 16, 2010 10:44 pm

Thanks folks- you have given me some new alternatives well worth thinking about.

FYI- We are 68(me) and 64(wife)
Bob

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Post by pkcrafter » Thu Sep 16, 2010 11:40 pm

bobbyrx wrote:Thanks folks- you have given me some new alternatives well worth thinking about.

FYI- We are 68(me) and 64(wife)
Bob
Good, then the 4.25% withdrawal rate is fine, but you can still offset with a moderate mortgage if you're more comfortable with it.




Paul
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Post by BruceM » Fri Sep 17, 2010 1:02 am

bobbyrx wrote:Thanks folks- you have given me some new alternatives well worth thinking about.

FYI- We are 68(me) and 64(wife)
Bob
Have you considered renting at the new location? Transaction costs for the selling, purchasing and reverse mortgaging will be considerable. And renting will provide some needed flexibility.

BruceM

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Re: Annuitizing the home

Post by YDNAL » Fri Sep 17, 2010 4:06 am

bobbyrx wrote:We are retired and are currently living comfortably on a 2.5% withdrawal rate from a very conservative 20% equity- 80% fixed portfolio. We are planning to move to a similar size house in an amenity filled community near our children. We will be selling our house and paying cash for a considerably more expensive one. After that, we would need to reboot our initial SWR to 4.25%- in red territory for a conservative portfolio and we might forgo some discretionary purchases. I am thinking of buying the new home for cash and reverse mortgaging to obtain @$1,400K/month. I am thinking of this as a form of asset allocation since the new house would be over 40% of our total net worth.
Thanks for any replies.
bobbyrx wrote:I did not want a conventional mortgage because the interest deduction would be mostly wasted since I presently come in at top of 15% bracket and take standard deduction I probably would wait a year before acting but I am very familiar with new location and kids seem firmly planted (daughter is tenured professor).
bobbyrx wrote:The HECM reverse mortgage calculator did indicate a monthly $1,375 for a $625K house. Hope that is correct.
Bobby,

I'm sure that you know that - very rough numbers - $625K x after tax 2.7% return = $16,875 = $1,406 monthly
Total Bond Admiral (VBTLX)

At 68/64yo, why would you buy - and reverse mortgage - a $625K house that represents 40% of your net worth?

Just asking....
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

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Post by kenbrumy » Fri Sep 17, 2010 7:43 am

I'll second YDNAL's comment about putting 40% of your net worth into a single, illiquid asset. As for reverse mortgages, I've always felt that anyone that feels they need a reverse mortgage to stay in their home should probably not be staying there. You've also said that buying the new home will reduce your spending in other areas. You are effectively choosing to be house poor. Why?

I suspect there are two drivers. One is "near children." That's a driver for me and my wife in a retirement location but kids get new jobs and move. The other is "ownership" which makes you or you wife adverse to renting.

Another factor may be "amenity filled" which I suspect is a "seniors only" subdivision. Typically, one spouse has to be over 55. What I've seen is that the typical buyer fits your profile and buys somewhere over 65. Health issues being what they are a significant number of properties turn over within a few years. Used properties are much harder to sell for the premium these developments initially have when new. When new, properties have the "excitement" the developer brings to the project. In my limited experience, the properties drop considerably when the project is "done" and the developer is no longer involved.

FWIW - I suggest you look for a lower priced place to live and forget about a reverse mortgage. Consider renting in the "amenity filled" community to see how you like it. There's a lot to be said for renting for 5 or more years. I think you'll agree you probably won't be there to pay off either a 15 or 30 year mortgage.

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Post by Ron » Fri Sep 17, 2010 8:00 am

kenbrumy wrote:One is "near children." That's a driver for me and my wife in a retirement location but kids get new jobs and move.
Just to reflect on the idea that you need to be near your children/grandkids.

I had an aunt/uncle that had this situation in their desire to be near their kids/grandkids and "help out" while in retirement.

Due to their son's advancement and movement within his company, which required relocation every few years, their standard of housing was downgraded over time, IMHO.

They went from their own home, to a home with an in-law apartment on the first move. On the next move, they moved into a condo (again, in the same neighborhood as their kids/grandkids). On the next move, they didn't have the money to buy their own place and they had to settle on an apartment (I know that's considered financially prudent today, but we're talking about 20+ years ago).

Every move became more difficult as they aged (physically) as they "followed their family", along with greatly reducing their assets.

I'm not saying they were wrong to follow their hearts, but sometimes you don't know what the results will be until it's too late.

- Ron

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Post by kenbrumy » Fri Sep 17, 2010 8:41 am

Ron wrote:Just to reflect on the idea that you need to be near your children/grandkids.

Every move became more difficult as they aged (physically) as they "followed their family", along with greatly reducing their assets.

I'm not saying they were wrong to follow their hearts, but sometimes you don't know what the results will be until it's too late.

- Ron
I agree. I've seen people do this same path. I didn't know enough about their financial situation but you have to be pretty dense to not realize every move costs a significant amount of money in transaction costs and moving costs. I think a lot of people forget (or don't care) that their children and grandchildren don't exist for the sole purpose of providing for their entertainment and support as they age.

I'd rather not have them slowly grow to hate me as I cling more and more to them as I age. The basic plan is to have my own life as long as possible and never need them to come over and do things I can no longer do because of my age/physical condition. They have instructions to be blunt and tell me when it's time to go into an independent living facility or that dreaded assisted living.

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Post by KyleAAA » Fri Sep 17, 2010 11:21 am

Transaction costs for taking out a mortgage will probably be lower than getting a reverse mortgage, which to me would tilt the scales in favor a conventional 30 year mortgage.

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bobbyrx
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Post by bobbyrx » Fri Sep 17, 2010 12:41 pm

Thanks for many thoughtful responses, particularly about following children, possible drop in home value and various mortgage proposals.

Our children have lived in this area for around 20 years and have secure jobs, one in business, the other has tenured position, so that probability of moving is fairly low. In any event, we would not follow a second time. We have visited area for many years and are fairly certain we would enjoy living there, especially having interests and hobbies very close as we age. Currently, we live in a distant NY suburb and I have to drive 20 miles each way several times a week to participate in my activities.

Concerning the reverse mortgage idea, the monthly payout, since it is a loan, would be tax free income, as opposed to taking out a conventional mortgage and using remaining taxable money to buy an SPIA. My thinking is that with a conventional mortgage, we would lose the value of the standard deduction and, in addition, would have to pay tax on a portion of the SPIA. There would also not be a total loss of control of money with a reverse as with a SPIA, since monthly payout would only gradually reduce home equity.

Thanks for helping me mull over this idea.

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Re: A difficult decision.

Post by amarone » Fri Sep 17, 2010 1:18 pm

Taylor Larimore wrote:You did not give your ages, but a 4 1/2% portfolio withdrawal rate should be relatively safe for 30 years even if you pay cash for your home. As you age your safe withdrawal increases.
Surely your safe withdrawal increases as you age because you do not need it to last 30 years. If you are looking for a 30-year safe withdrawal, I do not see how age is relevant.

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Age and safe withdrawal rates.

Post by Taylor Larimore » Fri Sep 17, 2010 2:48 pm

amarone wrote:
Taylor Larimore wrote:You did not give your ages, but a 4 1/2% portfolio withdrawal rate should be relatively safe for 30 years even if you pay cash for your home. As you age your safe withdrawal increases.
Surely your safe withdrawal increases as you age because you do not need it to last 30 years. If you are looking for a 30-year safe withdrawal, I do not see how age is relevant.
Hi Amarone:

At age 65 for example, most of us need to plan for a safe withdrawal rate lasting 30 years or more. At age 86 (my age) I can plan for a shorter period of withdrawing and also feel comfortable increasing our annual withdrawal amount.

Age is relevant for changing to a more conservative allocation and increasing withdrawals as we get older
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Re: Age and safe withdrawal rates.

Post by amarone » Fri Sep 17, 2010 2:54 pm

Taylor Larimore wrote:
amarone wrote:
Taylor Larimore wrote:You did not give your ages, but a 4 1/2% portfolio withdrawal rate should be relatively safe for 30 years even if you pay cash for your home. As you age your safe withdrawal increases.
Surely your safe withdrawal increases as you age because you do not need it to last 30 years. If you are looking for a 30-year safe withdrawal, I do not see how age is relevant.
Hi Amarone:

At age 65 for example, most of us need to plan for a safe withdrawal rate lasting 30 years or more. At age 86 (my age) I can plan for a shorter period of withdrawing and also feel comfortable increasing our annual withdrawal amount.

Age is relevant for changing to a more conservative allocation and increasing withdrawals as we get older
This I agree with. I read your initial post as saying that a 30 year plan starting at a higher age will allow a higher safe withdrawal rate, which was what puzzled me. I guess your initial post makes sense if there is an implied "because you do not need a 30 year plan" at the end of your final sentence.

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