In my line of work, I meet with clients that are either entering or are currently in retirement. One question that I ask married couples is, are you prepared for life after the loss of a spouse? Most of the time I get sort of a blank stare and then each spouse looks to one another for an answer. Needless to say, this strikes an uncomfortable chord with nearly all of them. I totally understand why this is the case. I myself have been married for close to two decades now to my lovely wife and business partner Candy. We have three great sons together and are constantly talking about what life will look like when we are able to take the next big adventure of our lives together “retirement”. We have taken care of the estate planning several years ago; however, that is just the technical part of it. I know there is more work to do in this arena from a financial planning perspective. Making sure both of our names are on all of the deeds to all of our major possessions, cars, etc. It’s just a very tough exercise and conversation because we just don’t want to think about it.

I have seen first hand how avoiding this subject can be devastating when a spouse is suddenly lost. Once the initial fog of grief has dissipated, two primary questions seem to come to mind for the surviving spouse. 1. Who am I as an individual, and what is now going to be my purpose for the rest of my life? 2. What is my financial position, and am I going to be able to maintain my standard of living for the balance of my retirement? I am not qualified to counsel with someone on the first question. However, the service that we provide can make a big and positive impact on an individual’s financial security during retirement.  Our company Mortgage South of Tennessee completed the very first federally insured HECM also known as the reverse mortgage in 1993. Since then, we have advised our clients on how to strategically deploy their home equity during retirement in order to shore up their financial position.

I am going to give two scenarios that illustrate how we have helped our clients maximize all of their available assets during retirement in order to shore up their financial positions. In the first scenario, John age 70 and Sara age 68 are referred to me by their financial advisor. Their home valued at $400k is paid for and they have a total retirement savings of $500k. Of these savings, $75k is cash or cash equivariant accounts. The other $425k are in qualified retirement accounts. “Qualified” retirement accounts are typically the employee sponsored retirement accounts that have been transferred into individual accounts after retirement. When an individual withdraws funds from these accounts, a taxable event takes place. So, if someone who has a $425k qualified IRA and they are in a 22% tax bracket they effectively have $331,500 after taxes are accounted for. John and Sara have a combined income of $6,500 a month. This is comprised of John’s social security benefit of $2,800, Sara’s social security benefit of $2,100 plus Sara’s $1,600 pension benefit. John and Sara have had a conversation with their financial about the” what if” scenario of one of them passing prior to the other. Their advisor explained to them that when people are married and one spouse passes, only the larger of the two social security checks will be available for the surviving spouse. They also reviewed Sara’s retirement separation paperwork and now understand that the surviving spouse would receive half of her current benefit. So, in John and Sara’s case, John’s monthly income would be $3,400 should Sara pre decease him. Sara’s monthly income would be $4,400 should John Pre decease her.

This did not sit well with John, Sara or their advisor, so they began to think of possible options to hedge against such a significant loss to their monthly cashflow in the event of the loss of a spouse. That’s were Mortgage South and the federally insured HECM or Reverse Mortgage comes into play. I sat down with John and Sara and completed a needs analysis. After completion, I proposed that they deploy the HECM stand by line of credit strategy. Now let me explain how that works. Based upon Sara’s age of 68, because she is the youngest spouse, the appraised value of $400k and the current expected interest rate of 6.380%, John and Sara would have a HECM “Reverse Mortgage” line of credit with an availability of $137,059. Next is the cool part and in my option the best kept secret about the FHA insured HECM loan. John and Sara’s HECM line of credit will not stay stagnant. Every month that they do not use their reverse mortgage line of credit, it grows and they have more access to additional funds! The stand by line of credit strategy would mean that John and Sara leave their HECM line of credit waiting in the wings until it is time to deploy it. Let’s say that in ten years John or Sara were to unfortunately pass away, their reverse mortgage line of credit that started out at $137,059 is now valued to the remaining spouse at $254,131 an increase of $117,072 or 46% from its original starting point! John or Sara could now start a monthly distribution to themselves in order to replace the loss of income due to the passing of their spouse there by maintaining the standard of living that they have been accustomed to for the entirety of their retirement. Now, I’m sure that you may have detailed questions that you would like to ask. I highly encourage you to reach out to me for a one-on-one conversation. This strategy will not fit every couple in retirement; however, in my opinion, thousands of middle to upper middle income retirees should at least be educated on how home equity can or should fit into their retirement planning.