(The writer is a Reuters columnist. The opinions expressed are his own.)
By Mark Miller
CHICAGO, Sept 28 (Reuters) - Delaying your Social Security benefit claim offers one of the best routes to higher retirement income - annual benefits increase 8 percent for every 12 months that you delay from age 62 to 70. But the strategy often comes with a challenge: how to meet living expenses while you wait?
How about this solution? Borrow against your house.
That is the pitch being thrown by some reverse mortgage marketers, who hope to attach their products to the substantial potential income benefits of delayed claiming at a time when their loan business is flagging.
The Social Security strategy is drawing sharp criticism from the federal Consumer Financial Protection Bureau (CFPB), whose recently issued study of the strategy found that loan costs exceed the potential higher Social Security benefit.
The CFPB also found that using a reverse loan to delay Social Security was likely to diminish the amount of home equity available to borrowers later in their lives, which can limit their options to move to new homes or handle a financial shock.
Reverse mortgages allow homeowners to borrow money against the value of their homes, receiving proceeds as a line of credit, fixed monthly payment or lump sum. The most popular loan type is the home equity conversion mortgage (HECM), which is administered, regulated and insured by the U.S. Department of Housing and Urban Development (HUD).
The product has never really taken off. The industry is on track to originate roughly 55,000 HECMs this year, according to John K. Lunde, president of Reverse Market Insight, which tracks industry statistics. That would be up a bit from last year, when just 48,700 new HECM loans were originated, but well off the peak year of 2008, when 115,000 new loans were issued.
Homeowners can qualify for the loans if they have sufficient equity in their property. Eligibility starts at age 62 - the same age that you become eligible to claim Social Security. The amounts you can borrow are determined by a formula that takes into account the percentage of the home’s value based on the borrower’s age and prevailing interest rates.
HECM borrowers do not have to pay back their loans until they move out of their homes or die. But defaults are possible because the loan terms require them to continue paying property taxes, hazard insurance and any required maintenance on their homes.
HUD, citing ongoing concerns about the financial strength of its HECM insurance program, last month announced an increase in initial insurance premiums, and tightened loan limits effective Oct. 2. At the same time, annual premiums will be reduced. (The changes will not impact current borrowers).
It is not surprising to see the reverse mortgage industry trying to connect to Social Security maximization strategies. Social Security is the country’s most universal retirement benefit, and the most important one for most workers. Meanwhile, home equity is the most important asset on the balance sheets of most older Americans - especially those who have not been able to save much for retirement. Many will need to tap this asset in retirement by downsizing, cash-out refinancing of a mortgage, home equity lines of credit or reverse loans.
Delaying Social Security pays off for retirees who live long and especially for married couples, who have better odds of beating the mortality tables. The best way to fund a delayed claim is by working longer - but that is not always possible. Research shows that about half of workers retire earlier than they expect as a result of job loss, health problems or the need to provide care to a family member.
“If we could get everyone to work to 70 no one would be facing much of a retirement shortfall,” said Jamie Hopkins, a professor of retirement income planning at the American College.
Spending down invested portfolio assets in the early years of retirement to fund a delayed Social Security claim is another strategy that has been gaining more acceptance. “That used to be called a crazy strategy too, but that has almost completely flipped now,” added Hopkins.
Hopkins takes issue with some of the methodology used in the CFPB report, but agrees that using a HECM to fund a Social Security delay is a complex decision. “People do need to understand the risk and the costs,” he said.
I asked Social Security Solutions, which creates software that helps people maximize their benefits, to run some hypothetical numbers on using a HECM to delay a claim. They found that it can work at least in some cases. “If you don’t have a lot of savings but do have equity in your house, it could make sense,” said William Meyer, the firm’s co-founder.
In one hypothetical example, a married couple both wait until age 70 to claim Social Security, and take out a HECM at age 62 to fund living expenses during the eight years that they wait for Social Security. Their net lifetime benefit rises by about one-third after adjusting for the HECM’s fees and the reduced home equity at the time of their death.
But Meyer found that successful execution depends on navigating a minefield of loan choices. The outcome also depends on a retiree’s longevity. “We concluded that to consider a HECM as an option you need an expert team of advisers who can communicate well and use their expertise.”
The average retiree will be overwhelmed, he said. “I certainly wouldn’t recommend this to my mom without expert guidance.” (Editing by Matthew Lewis)