ON THE MONEY: Answering reader questions

August 19, 2018

Question: I have just turned 65 and I have not yet commenced my Social Security retirement benefits. The benefit statement that I received shows that my Social Security benefits are $2,700 a month at age 66 and $3,564 at age 70. I have about $800,000 in my 401(k) which I will move to an IRA. Should I start Social Security at age 66 or leave it until 70?

Answer: This is a great question and one that deserves careful consideration. First things first, if you absolutely need the income from Social Security, then start the benefits. If your home is paid for and you could live comfortably on, for example, $60,000 a year until age 70, then go that route, since your Social Security benefits will increase by 32 percent, or 8 percent for each year that you delay receipt. If your IRA earned 4 percent during the deferral period and you continued to withdraw $60,000 each year, when you attain age 70, you would still have $635,000 in your IRA at that time. Obviously, if your IRA grew at a greater rate than 4 percent each year, you would have more funds left when you turned 70.

By delaying until age 70, the combination of your RMD from your IRA coupled with your Social Security income would generate $66,000 of annual income during that first year, and those two amounts together would gradually increase to over $81,000 by age 96.

Another caveat is that if your health is poor and you don’t believe that you would make it to age 78, then you could consider taking Social Security when you reach age 66. However, if your spouse is healthy, it may still make sense to delay your benefits until age 70, since at your passing, 100 percent of your delayed benefit amount would be payable to her.

Question: My husband and I own a house that is paid for and worth approximately $300,000, since we live very near downtown Aiken. We are each 80, healthy, and currently receive Social Security and a small pension. Our total income is $36,000, and we have no children. We would like to travel while we can and want to know if we should we sell our house or take out a reverse mortgage? Your thoughts?

Answer: Another great question. According to U.S. census data from 2013, home equity composed 66 percent of the net worth of individuals between 65 and 69; 70 percent for persons between the ages of 70 and 74; and 76 percent of the net worth of people over age 75.

If you sell your home you will have to move to another home, which you can either rent or purchase. Assuming you choose to rent, this sale will bring $300,000 of tax-free benefits into your retirement portfolio for you advisor to invest and for you to use for travel.

Moving before or during retirement can also afford you and your husband access to amenities unavailable in your current home: safety features (walk-in showers, first-floor bedrooms), and exercise facilities.

Since you don’t have any children, the issue of removing assets from your estate is not an issue, but you will have to put up with the hassle of moving.

A reverse mortgage is a type of loan which allows you and your husband to borrow from your home equity in a lump sum or as a line of credit; the latter is sometimes called a “standby reverse mortgage,” which means that credit is available when you want it. If you do opt for a reverse mortgage, this is the type I recommend. Here is a link to an excellent article on such a reverse mortgage: onefpa.org

The disadvantages to reverse mortgages are that they can be complicated and expensive, since the closing costs can be high. It is worth noting that only 2-3 percent of eligible seniors actually go this route.

If you want some additional information on reverse mortgages, then I highly recommend this website: mtgprofessor.com.

In last week’s column, I greatly overstated the amount of rebate you would receive from a 1.5% cash back credit card if you spent $12,000 a year on the card. The actual amount you would receive would be $180.

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