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refi vs reverse mortgage for new retiree (and other questions)

Posted: Sun Sep 20, 2020 12:50 pm
by pb1996
I have numerous questions to help assist my mother with her newly forced retirement (job layoff).
I will summarize her financial situation, followed by some of my questions.

Age 72
Tax status: Single (Connecticut resident)
Checking account: $9500
Vanguard Roth VTXVX $20473
Traditional 401k $186750

Social Security: $1448.40/month
Monthly Mortgage + escrow: $1426.37
Mortgage balance: $92053.43 (currently in the middle of a 30year Fixed in the 4-5% range mortgage)
Estimated house value: $320000

Monthly miscellaneous expenses e.g. utilities/groceries/gas/etc: $1500 (guestimate)

The goal is for her to live off her own money as long as possible without needing help from kids (if she runs out of money with her last breath that is fine).

The first thing I plan on doing is rolling over her 401k to a vanguard traditional IRA (I'm assuming VTINX). I figure she will use roth savings to get through the rest of this year if needed and then can withdraw from tIRA mostly tax free starting next year as long as she can keep withdrawals low enough.

Here are some of the first questions that pop into mind (let me know if there are any other major things I need to be aware of):

1. If she wants to stay in this house, I'm thinking the primary options are to refinance or get a reverse mortgage. How to decide which is better? Any recommendations on lenders that will lend to a newly unemployed retiree based only on social security and retirement assets and house equity?
2. Is there a good role for a SPIA or other annuity here?
3. Am I calculating it correctly that $1000/month withdrawal should last about 20 years (and be mostly tax free)?
4. Are there any other major pearls/pitfalls I should be thinking about at this time?

Thanks!

Pb

Re: refi vs reverse mortgage for new retiree (and other questions)

Posted: Sun Sep 20, 2020 2:40 pm
by David Jay
pb1996 wrote: Sun Sep 20, 2020 12:50 pm 1. If she wants to stay in this house, I'm thinking the primary options are to refinance or get a reverse mortgage.
I disagree. She is mortgage-poor. She doesn’t need a different mortgage, she needs to pay it off. Then SS meets her needs.

How to convert 401k/IRA money to mortgage payoff? That is the question. Let’s look at $30,000 a year for 3 years. I think I would re-cast the mortgage to control costs for the next 3 years as I pay it off.

Then, SS covers expenses and she still has about $100K (and hopefully 10 or 20 years of growth) to cover “surprises”.

Re: refi vs reverse mortgage for new retiree (and other questions)

Posted: Sun Sep 20, 2020 5:48 pm
by Watty
One of the problems with a reverse mortgage is that it sometimes encourages a relatively young retired person to stay in a house that is too expensive for them to maintain.
pb1996 wrote: Sun Sep 20, 2020 12:50 pm 4. Are there any other major pearls/pitfalls I should be thinking about at this time?
The typical single family home can also be very socially isolating for an older person especially when they need to give up driving.

My mom outlived my dad and she insisted on staying in the large suburban single family home that I was raised in. She could afford it but the limited transportation options meant that she drove way longer than she should have. By the time she was in her late 70 most of her friends had either died, moved away, or also become less mobile. She had a housekeeper that came in most days but since my siblings and I lived in different cities there were periods of time when she did not see anyone other than her housekeeper.

That was her choice and I can understand it but for years we tried to talk her into moving into some sort of senior community or condo which she could have afforded where she could have a lot more social contact but she refused to even consider that since she had lived in that house for around 40 years by then.

Anyway it would be good to consider how that house will work for your mom in 10 years, especially if it has even a few stairs, and to look at moving into some sort of condo or small house in a senior community where she might be able to buy a condo for cash with her home equity. That could help her cash flow and there later on she could get a reverse mortgage on the condo if she needs to.

Most housing markets are pretty strong right now so that if she decides to sell her house now that might be pretty easy to do. If she waits to sell it then changes her mind in five years then she might end up needing to sell it during a bad housing market.

She could also look into selling her house and renting an apartment instead of buying a condo.

Re: refi vs reverse mortgage for new retiree (and other questions)

Posted: Sun Sep 20, 2020 8:07 pm
by pb1996
David Jay wrote: Sun Sep 20, 2020 2:40 pm
pb1996 wrote: Sun Sep 20, 2020 12:50 pm 1. If she wants to stay in this house, I'm thinking the primary options are to refinance or get a reverse mortgage.
I disagree. She is mortgage-poor. She doesn’t need a different mortgage, she needs to pay it off. Then SS meets her needs.

How to convert 401k/IRA money to mortgage payoff? That is the question. Let’s look at $30,000 a year for 3 years. I think I would re-cast the mortgage to control costs for the next 3 years as I pay it off.

Then, SS covers expenses and she still has about $100K (and hopefully 10 or 20 years of growth) to cover “surprises”.
Recasting is an interesting option I hadn't thought of. But as far as I can tell, she can only withdraw about $13000/year tax free from her 401k (soon to be tIRA). Anything over that she would be paying about 10% or 12% tax in order to save 4.5% mortgage interest which I'm assuming doesn't make sense? Would recasting still be a good idea if she doesn't intend on paying off mortgage any faster than tax free withdrawal would allow?

Re: refi vs reverse mortgage for new retiree (and other questions)

Posted: Sun Sep 20, 2020 8:27 pm
by Mike Scott
That seems like a lot of house for that much income. Is selling / downsizing / renting an option?

Re: refi vs reverse mortgage for new retiree (and other questions)

Posted: Sun Sep 20, 2020 8:35 pm
by pb1996
Mike Scott wrote: Sun Sep 20, 2020 8:27 pm That seems like a lot of house for that much income. Is selling / downsizing / renting an option?
It IS too much house for her. This "retirement" came earlier than expected/hoped. It's gonna take some time (maybe even forever?) before I can convince her to downsize. Trying to figure out all the options, including whether having her live in the house until health problems get in the way is a feasible plan.

Re: refi vs reverse mortgage for new retiree (and other questions)

Posted: Sun Sep 20, 2020 8:50 pm
by David Jay
I agree with others who suggest this is too much house for her income level. It will be tough.
pb1996 wrote: Sun Sep 20, 2020 8:07 pm Anything over that she would be paying about 10% or 12% tax in order to save 4.5% mortgage interest which I'm assuming doesn't make sense?
This statement confuses the math. You are comparing a one-time 12% to an annual 4.5% for next 15 years (because she does not pay ahead on the mortgage as she needs the withdrawals for living expenses).

Don’t let the tail (taxes) wag the dog (life decisions).
Would recasting still be a good idea if she doesn't intend on paying off mortgage any faster than tax free withdrawal would allow?
Yes, but the math still suggests paying it off sooner. Waiting depletes the funds she will need down the road.

Re: refi vs reverse mortgage for new retiree (and other questions)

Posted: Mon Sep 21, 2020 8:11 am
by David Jay
After doing some “back of the napkin” calculations, here is how I would proceed if you are dead set against withdrawing more than $13,000 a year (I don’t believe this is the best choice):

1. Put $25,000 on the mortgage ($20,000 from Roth, $5000 from checking). This lowers the balance to lower the payment after re-cast.

2. Re-cast the mortgage. It may reduce the payment by perhaps $350 to $400 a month, depending on the initial loan value.

3. Withdraw a $1000 a month for living expenses, which never pays off the mortgage but this give her time to come to understand her need to downsize. If she owes less than $70k, she has about $250K in equity for a mortgage-free home.

Re: refi vs reverse mortgage for new retiree (and other questions)

Posted: Mon Sep 21, 2020 3:21 pm
by Golf maniac
I am assuming she wants to live in her current city. Definitely trying to get her to sell and downsize is key. Inflation is really the key. Specifically medical cost inflation as we age. A smaller, cheaper place with no mortgage is ideal allowing her to have Roth and 401k for unusual expenses and hopefully SS covers everyday living. Good luck.