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So, has anyone included this in your possible retirement scenarios?

I was doing some research and ran some numbers.

I figure that by the time we're ready to retire we may have about $1,750k. So, with a SWR of 4%, this would yield $70k. With both of us maxing out our SS, figure about $30k, to total $100k. BUT, we still need somewhere to live.

We'd really like to move to Hilton Head Island - we vacation there every year and love the area. I've looked at single family homes for sale and one I like was listed for $440k. Assuming a 4-5% increase in value, in 14 years it would cost about $800k.

So, I went to the NECM website and the example they gave was for a home valued at $206k, yielding $6k per year from a reverse mortgage. I'm thinking an $800k home should yield 4 times that or $24k.

So, taking $800k out of retirement accounts, paying 35% taxes or $280k, would leave us $670k in assets.

Results:
SWR on $670k assets = $26,800
Income from home = 24,000
SS = 30,000
TOTAL = $80,800 and no rent or house expense

Now, we have no kids. And, we both come from large families, i.e. 6 siblings each. We have no great desire to leave anything to any of them, so this seems like a way for us to have our dream house in our retirement and still have decent income to enjoy our twilight years!

The biggest drawback is that most of the programs require both parties to be at least 62 years old. I'll only be 59 when I hope to retire and DH is 4 years younger than me!

Other than that wrinkle I haven't worked out yet, what do you all think?

3MM
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"Other than that wrinkle I haven't worked out yet, what do you all think?"

Hi 3MM,

I think you don't have enough wrinkles yet ;-) Not having unlimited funds I will definitely consider a reverse if it makes sense when/if I need more income...

Good luck,

Regards, Ken ( Gotta run, the dance floor is calling my name....)
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So, taking $800k out of retirement accounts, paying 35% taxes or $280k, would leave us $670k in assets.

Around here in CA, I have seen real estate people advertising that they can help you buy real estate within your IRA. Seems to me like this ought to be posssible somehow, but I have no first-hand knowledge. I am pretty certain it would have to be income-producing property.

Anyway, you might want to look into the process. If you bought a house say two years before you wanted to move in and rented it out you might be able to avoid that $280k in taxes.

I have no idea what the rules are for conversion of rental property acquired within an IRA to personal residence, but if you can do it, you keep $280k in your account.

Of course, this might screw up the reverse mortgage idea...

A comment on the plan you describe is that the "income" from the reverse mortgage is not inflation-adjusted.

You will also need to plan on some maintenance expense for the house.
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OldOne,

the RE in the IRA is a possible idea. Probably right on the reverse mortgage idea, but the taxes look better.

As far as maintenance expense, I'm thinking I'm going to have that no matter if I did the reverse mortgage or not.

I'm still mulling over the idea.

thanks
3MM
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Yes -- if you can find a willing custodian it is acceptable to invest in real estate within an IRA. (But the property must not be encumbered with any loans -- you must own the property free and clear.)

Neither you nor any close relative can live in the property while it is owned inside the IRA.

You don't have to sell the property; you can take it as a distribution from the IRA, although you should consult a tax expert in advance if you plan on doing this.
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So, has anyone included this in your possible retirement scenarios?

I include the possibility of a reverse mortgage as a 'last resort'. IOW, if I'm a little shy of my retirement savings goal at the time I'd like to retire, I would consider that a reverse mortgage could make up for the last 5 years or so of annual expenses that I'm short.

Assuming a 4-5% increase in value, in 14 years it would cost about $800k.

I just read somewhere that historically, in most years, property values barely keep pace with inflation.

So, taking $800k out of retirement accounts, paying 35% taxes or $280k, would leave us $670k in assets.

Results:
SWR on $670k assets = $26,800
Income from home = 24,000
SS = 30,000
TOTAL = $80,800 and no rent or house expense


You're assuming that the entire cost of the house must come out of your retirement savings--don't you own a home now, that you would sell to buy your 'dream' home? IMHO, depleting half of my retirement assets to buy a home would be too high a price to pay.

I expect to clear about $125K from my current apartment. I would use that, plus about 25% of my portfolio to buy a new home, but I wouldn't use 50% of my portfolio savings to do so. Therefore, I intend to buy a home that's within that price range for my risk/comfort level. If that means I can only afford a condo, in a less 'expensive' area, then that's what I'll do. JMHO

2old




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buy real estate within your IRA.

There are a lot of restrictions on this. You can't generally buy a home that you will live in with IRA funds, it is only for investment properties, so it wouldn't help this situation. Here is more info:

http://boards.fool.com/Message.asp?mid=17596619

T
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The earlier you get have a reverse mortgage, the more the miracle of compound interest works against you.

Just a couple of point to consider.

1) Don't forget inflation. A $24,000 reverse mortgage will not be worth very much if you live into your 90's after 30 years of even mild inflation.

2) Look into just who(probably you!) pays for maintenance. After years of inflation, a new roof may cost more than you are getting paid.

3) You will be buying a house in a hurricane prone area that may affect your ability to get a reverse mortgage without getting some very expensive insurance. You will also be locked into buying the insurance so that if in ten years they quadruple the rates you will have no alternative but to buy it.

4) If you do decide to take that $1.1 million out of your retirement account to buy the house, consider moving to a state with no income tax for that tax year. This could save you some from paying the state income taxes on it. During that year you could travel with the money that you save but you should check with a tax advisor on just what the residency restrictions are.

5) If you do get a reverse mortgage, you should probably look at waiting to get a reverse mortgage until you have more or less depleted your other funds. If you are spending $50K (in addition to social security) per year then the $670K will last you how long? At least 15 and maybe up to 20 years or more! You will get a lot more on the reverse mortgage at 80 than you will at 60 and the house will probably appreciate some more by then. This would also give you more flexibility in case you need to go into assisted living or one of you passes away before then.

6) Run the numbers, if instead you leave the $1.1 in retirement accounts and buy the $800K house with 20% down(say with equity from your current home) then with a 30 year FRM, then the mortgage payment would be about $4000 per month or $48K per year. If you add in the $24K per year in income that you want, then you would be withdrawing $72K per year. Even if you invested the $1.1 million in something very conservative like government bonds, you should have the house almost paid off by the time the $1.1 million is depleted. Say it lasts 25 years, then you would be getting a reverse mortgage at age 85(if you are still alive) which should pay you lots more, especially since the house will likely have appreciated more during the extra 25 years.

7) TOTAL = $80,800 and no rent or house expense And much of it not taxable! Wow, there are only so many cruises or trips to Europe that you can go on and when you get into your 70's you will start slowing down. If it were me, I would take a hard look at living on a smaller budget and retiring five or ten years earlier. There is a dang good chance you will not live long enough to really enjoy your money. Lets see, you were talking about retiring at in 14 years when you are 59 you are 45 now. That means that there is roughly a 9% (ouch!) chance that you will not live to be 59 and a 25% chance of not living to 69(double ouch!). I calculated this by using the table(where I used the male column) at ;

http://www.ssa.gov/OACT/STATS/table4c6.html



Greg
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Author: 3muttsmom | Date: 4/21/05 9:08 PM | Number: 45709
I figure that by the time we're ready to retire we may have about $1,750k. So, with a SWR of 4%, this would yield $70k. With both of us maxing out our SS, figure about $30k, to total $100k. BUT, we still need somewhere to live.

We'd really like to move to Hilton Head Island - we vacation there every year and love the area. I've looked at single family homes for sale and one I like was listed for $440k. Assuming a 4-5% increase in value, in 14 years it would cost about $800k.

So, I went to the NECM website and the example they gave was for a home valued at $206k, yielding $6k per year from a reverse mortgage. I'm thinking an $800k home should yield 4 times that or $24k.

So, taking $800k out of retirement accounts, paying 35% taxes or $280k, would leave us $670k in assets.

Results:
SWR on $670k assets = $26,800
Income from home = 24,000
SS = 30,000
TOTAL = $80,800 and no rent or house expense

Now, we have no kids. And, we both come from large families, i.e. 6 siblings each. We have no great desire to leave anything to any of them, so this seems like a way for us to have our dream house in our retirement and still have decent income to enjoy our twilight years!


I am not a big fan of reverse mortgages. They simply don't pay enough.

Let's assume that instead of removing that $800K from your tax sheltered accounts, you annuitized it inside the shelter. It would generate $4301 per month, or $51,612 per year, for the rest of your life, 20 years certain (guaranteed 20 years in case you die earlier). That is over twice as much as you would get from a reverse mortgage for the same amount, and it continues for your entire life! Heck, it might even be enough to cover most of a 20 year mortgage payment if you wanted to go that route. Then, assuming you live more than 20 more years, you'd own the house and the payments would still continue. You'd probably want to use a 30 year certain if you got a 30 year mortgage (just in the event of your dying prematurely).

Go to http://www.immediateannuities.com/ to see how much income you can get for different amounts of cash over different annuity periods.

I have found immediate annuities to be very cost effective, and very helpful to people who do not wish to leave a large inheritance. It's an excellent way to spend down your assets without the risk of running out.

Of course, a fixed annuity payment will become effectively less and less as inflation eats away at it's buying power. You have to plan for this and always invest at least 3% of each annuity payment into something that will grow as fast or faster than inflation. If you are paying a mortgage with the annuity payment, you are automatically compensating for inflation due to the long term growth in value of the real estate.

Also, don't confuse immediate annuities with variable annuities. Variable annuities are usually very expensive and seldom right for anyone.

Russ
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Around here in CA, I have seen real estate people advertising that they can help you buy real estate within your IRA. Seems to me like this ought to be posssible somehow, but I have no first-hand knowledge.

It is pretty simple to buy property with your IRA.

It can not be a residence you use but it can be a rental property that you distribute to yourself after you retire.

John B. Corey Jr.
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IRR,

Some good comments.

One is wrong though.

(But the property must not be encumbered with any loans -- you must own the property free and clear.)

You can secure a loan against the property and have the property owned by the IRA. It would be a non-recourse loan and there are a few select lenders that provide such financing. They will want 40% down generally.

John B. Corey Jr.
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John,

I am obviously not a tax lawyer. When I read publication 590 cover-to-cover it seemed to say very clearly that neither the IRA beneficiary nor the custodian may pledge items inside the IRA as security for any loan. But there are indeed several companies out there who are happy to offer non-recourse loans in order to purchase property inside the IRA. Obviously they wouldn't be advertising the service if it was illegal, right?

I just don't see where the loophole in publication 590 is that allows these loans.
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If the IRA buys a property and the loan that is obtained is non-recourse then none of the funds in still in the IRA are pledged. The equity that the IRA put into the property is at risk.

Netting this down you can lose the funds invested but the lender can not come back against the IRA for any other losses after they have taken the house back (definition of non-recourse). Hence the lender and the IRS rules appear to line up.

The tax forum seems to have good folks with a lot of knowledge. This is a narrow topic and people might not be well informed. With both of those statements as a backdrop see what sort of answer you get there if you wanted to dig even deeper. Just be clear that the loan is non-recourse so that it is obvious we are not talking about a conventional home loan.

John B. Corey Jr.
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http://online.wsj.com/article/0,,SB111447656372516671,00.html?mod=todays_us_personal_journal

Basically an article about senoirs using reverse mortgages to buy toys before they are too old to jet ski.


For more sensible advice:

"The National Council on the Aging, a Washington-based advocacy group for the elderly, is promoting them as a way to pay for home modifications and medical care that could help aging homeowners avoid or postpone moving to more expensive nursing homes.

The notion that retirees are using that equity for fun before their health erodes "is troublesome," says Barbara Stucki, a consultant in Bend, Ore., who led the council's research, "because people don't want to end up in a nursing home, and they might avoid it if they planned ahead a little bit.""

My take is that some senoirs are selling the farm to the bank in hopes that once they are too old to have fun they will just go into a nursing home and have the gov pick up the tab. The problem is that if everyone tries this, it will stop working.
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