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. 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.

Print the post  


The Retirement Investing Board
This is the board for all discussions related to Investing for and during retirement. To keep the board relevant and Foolish to everyone, please avoid making any posts pertaining to political partisanship. Fool on and Retire on!
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.