No. of Recommendations: 2
Summary: The reverse mortgages on the AARP website are a bad deal.

I will not disagree with your conclusion (in general), but the way you get there is way off...


I don't know what the tax rate would be if you sold that $1M home but let's assume a very high 40%.

You would never pay 40% tax on the sale of a $1M home. Not unless you are in a high tax area AND the home shot up in value by gargantuan degrees in less than 2 years...

If you have lived in the home for 2 of the last 5 years, the first $250K (individual) or $500K (couple) of gain is tax free. Also, the amount spent on the home (total purchase costs + home improvements) will never be taxed.



You sell the home, pay the government $400K and put the remaining $600K in a suitcase under your bed.

Let's also assume a 4% annual inflation rate on your "under the bed cash" over the next 30 years.


A more likely case for the sale of a $1M house would be that less than $250K is actually taxable. So if we assume 40% taxes on the $250K that is taxed, you actually have $900K to put into the bank.

I don't agree with using 4% as your inflation rate going forward (I think 3-3.5% is more likely), but that's just feeling, not fact.



Over the next 360 months, you and DW can draw an inflation-adjusted monthly withdrawal of $860.

Summary: The reverse mortgages on the AARP website are a bad deal.


Wait...how does the first statement lead to the second? It looks to me like you are saying the $600K gives you a higher withdraw rate than the reverse mortgage so the home sale is the better deal...

If this is what you are saying, you are missing the boat ENTIRELY on what a reverse mortgage accomplishes. If you sell the home, you have money, but you have to now pay for housing expenses elsewhere IN ADDITION to your other expenses. If you perform a reverse mortgage, you keep the home AND receive money for your other expenses. You need to compare apples to apples!!!

I will trust your calculations for withdrawal rates at 4% annual inflation over 30 years...and I will scale them to represent the two "real" cases as you described them...

Case 1 -- Sell the Home -- receive $900K after taxes
--> monthly inflation-adjusted withdrawal rate of $1290
--> must pay for housing

Case 2 -- Reverse Mortgage -- receive $137K
--> monthly inflation-adjusted withdrawal rate of $196
--> housing expenses already covered

So...if your replacement housing cost will be less than $1100, you are better off selling the home; if they will be greater than $1100, you are better off in the reverse mortgage (in this simplified analysis). Since most people will not replace a $1M home with something that costs less than $1100/month, this shows that the reverse mortgage is something that deserves consideration.

The big problem with reverse mortgages is the fees. Typically, the fees/rate you receive is not very good compared to the "market" rate for mortgages. Often, the best (financial -- this all ignores the emotional side of things) solution is to simply downsize...go from the $1M house to a $500K house and use the remaining $400K (after paying taxes) to provide a 360-month inflation-adjusted withdrawal rate of $570/month.

Reverse mortgages *can* be a good tool. But usually there are better options out there.

Acme
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