Compare this result to the results from the reverse mortgage calculator at the NRMLA website. These calculations assume a 66-year-old owning a $150,000 home free and clear:

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Reverse Mortgages vs Delayed Social Security

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One of the really great things about the internet are the powerful financial calculators and tools made available to the average person. Using these tools to test assumptions and compare results can lead to interesting and surprising results - and, hopefully, better financial decisions.

As an example, I recently did some web research on the costs to retirees of taking social security benefits before normal retirement age. The Social Security Administration website includes an excellent “Quick” calculator that anyone can use. This calculator provides a neat summary of the difference in benefit levels that will be received at different retirement ages. You can also get a break-even analysis showing the age at which you will recoup amounts not received by taking early benefits. Live beyond this age - you win.

But what really stands out from using this calculator is the large monthly benefit increases achievable by waiting just a few years. These are additional retirement income streams that not only are payable for life but are also indexed to inflation.

In the example below, a 62-year-old earning $50,000 and looking at social security options stands to gain an additional $390 per month for the rest of his life by waiting until age 66 to collect. This is a 41% monthly benefit increase!

Information you submitted
Date of birth: 6/15/1944
Current earnings: $50,000.00
Benefit in year-2006 dollars

Retirement Benefit Estimates
Retirement age Monthly benefit amount1
62 and 1 month in 2006 $949.00
66 in 2010 $1,339.00
70 in 2014 $1,865.00
1 Assumes no future increases in prices or earnings.
Your home is in XYZ County, MI 49999. Your age is calculated as if the loan closing date will be Tuesday, July 18th, 2006 ( a weekday 60 days from now ). You will then be 66 years old.
 
The table below shows the maximum creditline (with no monthly Income), and the maximum monthly income (with no creditline) that may be available after paying off any mortgages and liens against your home. The figures do not reflect any needed home repairs.

These programs allow you to allocate funds between a creditline (cash account) and monthly income. HECM is the federally-insured "Home Equity Conversion Mortgage". The "HomeKeeper Mortgage" is from Fannie Mae.
 

 

YOU
COULD GET

 Monthly
Adjusting
HECM		 Annual
Adjusting
HECM		 Fannie
Mae
HomeKeeper
1) A single lump sum advance of $67,350 $47,337 $25,971
2) Or a creditline account of $67,350 $47,337 $25,971
      that grows larger each year by 7.24%* 8.96%* 0%
      so, if unused, available credit
          in 5 years would be		 $95,524 $72,693 $25,971
           in 10 years would be $135,485 $111,633 $25,971
3) Or a monthly loan advance for
   as long as you live in your home		 $437 $361 $212
4) Or any combination of lump sum at closing, creditline account, and monthly advance

What is striking is that the lifetime additional monthly benefit forgone by taking early social security ($390) approximates the monthly income stream ($361-$437) that a 66-year-old could generate via the reverse mortgage route.

This is only one simple example but it does beg the question: “Are Americans digging themselves into a financial hole by drawing social security benefits too soon and then compensating by taking out expensive reverse mortgages? Moreover, are they replacing (perhaps within a matter of a few years) a government provided and guaranteed retirement benefit with an income stream paid for out of their own savings?”

I did not find any studies specifically addressing this issue but two facts are known: 1) 7 out of 10 Americans elect to take early social security benefits; more than half take benefits at 62 (the earliest possible age) and, 2) reverse mortgage originations are growing at a record pace. It would be quite interesting to survey reverse mortgage applicants to determine the percentage that elected to draw social security early.

Another point worth considering: if you’re a renter or a homeowner without significant equity, the risks of taking social security benefits early are compounded since you will not have the home equity safety net.

Article Series - social security

  1. Social Security + Reverse Mortgage = Procrastinate!
  2. Reverse Mortgages vs Delayed Social Security
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One Response to “Reverse Mortgages vs Delayed Social Security”

  1. Report from Center for Retirement Research - Reverse Mortgage Information Says:
    August 13th, 2006 at 10:01 am

    […] We’ve noted before the critical importance of maxmizing social security payments by waiting until normal retirement age. […]

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