Mark Livingstone and
Cornerstone First Financial

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How Retired Homeowners Can Avoid Running Out Of Money

The combination of increased longevity and declines in the coverage of defined benefit pension plans means that retired homeowners increasingly risk running out of money because they live too long. Those who have significant equity in a home, however, can reduce or eliminate the risk if they use their equity wisely. This article will compare three strategies that use a home equity conversion mortgage (HECM), also known as a reverse mortgage. I will illustrate with the case of Mary Jones, who is now 62, owns a house worth $200,000 and no mortgage, and is worried about her ability to continue her life style past 82.

HECM / Reverse Mortgages
Given her age and house value, Jones can draw a credit line of $96,175, which can generate income at age 82 in either of two ways. One way is to wait a year (during which the line will grow to $101,138), and then purchase a longevity annuity from a life insurance company that will begin monthly payments at 82 and continue for life. (The reason for the delay is a HUD rule limiting draws against credit lines in the first year.) The available life annuity, obtained from, would be $2,812 for a male, $2,421 for a female.

As an alternative, Jones could sit on her credit line for 20 years, and then convert it to a monthly tenure payment that would continue so long as Jones lived in the house. During the 20 years, the credit line would grow at the mortgage rate plus the mortgage insurance premium of 1.25 percent. If rates stayed where they are today, the tenure payment in 20 years would be $2,685, or about the same as the longevity payments.

But if rates increased, the credit line growth would accelerate and with it the tenure payment that could be purchased with the line after 20 years. If the rate over the 20 years was 8 percent, for example, the available tenure payment would be $5,738, or more than twice as large as the longevity annuity payment.

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