When I talk with Colorado homeowners about retirement, I often hear the same concern: “I thought I had enough money, but everything costs so much more now.”
I understand why you may feel that way. A retirement account balance that looked comfortable five or six years ago may not provide the same security today. Housing, utilities, energy, groceries, insurance, and home repairs have all placed new pressure on fixed retirement income.
In a recent episode of Reverse Mortgage Radio, I discussed what happens when $500,000 is no longer what it used to be. I also explained how a reverse mortgage may help some Colorado homeowners create more cash-flow flexibility, reduce withdrawals from investments, and prepare for future expenses.
A reverse mortgage is not right for everyone. My goal is not to talk you into one. My goal is to help you understand the facts so you can make an informed decision about your own situation.
Inflation Can Quietly Change Your Retirement Plan
Imagine a couple who retired in 2020 or 2021 with $500,000 in retirement savings. At that time, they may have believed they were in reasonably good shape.
They began collecting Social Security and planned to withdraw a modest amount from their investments each month. Their budget seemed manageable. But then everyday costs increased faster than expected.
The podcast referenced Colorado inflation running around 5%, based on data from the Bureau of Labor Statistics. Housing and energy have been especially important drivers at various points. A Colorado household that spends more on utilities, fuel, property costs, and other necessities may feel a much higher increase than the national headline number suggests.
I also discussed an estimate that the average Colorado household had spent approximately $60,000 more since 2020 simply because of inflation. That money has to come from somewhere. It may come from your savings, your investment account, or the breathing room you once had in your monthly budget.
The challenge becomes even greater when your Social Security, pension, or other income does not increase as quickly as your expenses. Even a modest annual increase in income may not keep pace with the rising cost of the things you cannot easily avoid.
Why Fixed Retirement Income Can Feel Smaller Every Year
Inflation does not usually arrive as one dramatic bill. It shows up gradually.
Your energy bill rises. Your homeowner’s insurance renews at a higher premium. A repair costs more than it did a few years ago. Groceries take a larger share of your budget. If you still have a mortgage payment, that payment continues regardless of whether your other expenses increase.
Over time, those changes can force you to withdraw more from your retirement savings. You may not be spending extravagantly. You may simply be trying to maintain the lifestyle you planned.
That could include:
- Visiting children and grandchildren
- Playing golf or participating in community activities
- Supporting your church or family
- Handling home repairs
- Paying for healthcare-related needs
- Keeping enough money available for emergencies
I believe cash flow is one of the most important parts of retirement planning. If your income is fixed while your expenses continue to rise, creating another source of cash flow may help reduce stress.
Sequence-of-Returns Risk: The Problem With Selling Investments During a Down Market
Inflation can create another problem when you are drawing from an investment portfolio.
If the market declines while you are also withdrawing money, you may have to sell investments that have lost value. This is often called sequence-of-returns risk. In plain language, the order in which investment gains and losses occur can affect how long your portfolio lasts.
For example, suppose you need an additional $1,000 per month to cover your expenses. If your portfolio is performing well, withdrawing that money may feel manageable. But if the market has declined, you are selling a depreciated asset to generate the same $1,000.
That can place additional pressure on the remaining account balance. You may then need to withdraw even more later because inflation has continued to push up your expenses.
A reverse mortgage may provide another source of funds during certain periods. If you can use home equity instead of selling investments during a market decline, you may be able to reduce portfolio withdrawals. This does not eliminate investment risk, but it may give you another option to discuss with your financial advisor.
Paying Off an Existing Mortgage May Improve Monthly Cash Flow
One way some homeowners use a reverse mortgage is to pay off an existing mortgage or other liens secured by the home.
When a reverse mortgage closes, existing mortgages generally must be paid off. This may include more than your primary mortgage. Some homeowners also have:
- A home equity line of credit, or HELOC
- A solar loan secured by the property
- A home improvement loan
- A second mortgage
- Other liens connected to the home
You may not think of a solar or improvement loan as a mortgage, but if it creates a lien against your home, it may affect your available options.
If the reverse mortgage can pay off those obligations, you may no longer have the same monthly principal-and-interest payment. That could free up $1,000, $1,200, or another amount each month, depending on your current loan.
You can learn more about this issue in our explanation of how a reverse mortgage handles an existing mortgage.
However, I want to be very clear: the available loan proceeds may not be enough to pay off every existing obligation and provide a large amount of cash afterward. Higher interest rates have reduced the percentage of a home’s value that may be borrowed.
When rates were closer to 3%, a homeowner around age 65 or 70 might have qualified for approximately half of the home’s value, depending on the circumstances. With rates in the 6% range, the available percentage may be closer to 32% to 40%.
That difference can be significant. A home may have substantial equity, but there may not be enough available proceeds to pay off the current mortgage. I need to review the actual numbers before telling you whether this strategy could work.
The Five Responsibilities You Must Continue
A reverse mortgage does not mean you give up ownership of your home. Your name remains on the title.
You must continue meeting five important obligations:
- Pay your property taxes.
- Keep homeowner’s insurance in place.
- Maintain the home.
- Live in the home as your primary residence.
- Keep your name on the title.
These responsibilities remain important because the home secures the loan. You already have similar responsibilities with a traditional mortgage, although the monthly payment structure is different.
With a reverse mortgage, interest continues to accrue on the balance. However, you generally do not make monthly principal-and-interest payments as long as you meet the loan requirements. You should review all costs, terms, and obligations carefully before making a decision. Our reverse mortgage FAQ provides a helpful starting point.
A Growing Line of Credit Can Help With Future Expenses
Some homeowners prefer a reverse mortgage line of credit rather than taking all available funds at once.
A line of credit may be useful as an emergency reserve for:
- Home repairs
- Rising utility costs
- Medical or caregiving expenses
- Help with yard work or snow removal
- Family support
- Future monthly income needs
In the podcast, I used an example involving a 6% rate. The amount borrowed would be charged interest, while the unused portion of the line of credit could grow at approximately 6.5%, based on the loan terms discussed.
That growth does not mean you are earning taxable interest. It increases the amount you may be able to borrow in the future. Funds received from a reverse mortgage are generally considered loan proceeds rather than taxable income, although you should discuss your individual tax situation with a qualified tax professional.
You may also be able to convert part of the line of credit into monthly payments later. For example, you could establish the line of credit at age 70 and use it years later to help pay for in-home assistance, cooking, cleaning, yard care, or other services.
You can read more about this option in our guide to how a reverse mortgage line of credit works.
A Reverse Mortgage Is Not Only for Desperate Homeowners
One of the biggest misconceptions I hear is that reverse mortgages are only for people who have run out of money.
That is not true. Some homeowners consider a reverse mortgage while they still have retirement savings. Their goal may be to reduce portfolio withdrawals, eliminate a mortgage payment, establish an emergency fund, or create additional monthly income.
Of course, using home equity has trade-offs. Interest accrues, fees may apply, and the loan can reduce the equity available to heirs or for future housing decisions. That is why I encourage you to compare alternatives, including downsizing, selling and investing the proceeds, renting, or speaking with a financial advisor.
The right answer depends on your age, home value, mortgage balance, income, assets, health, family goals, and plans for the future.
Take Time to Get the Facts
If inflation has made your retirement plan feel less certain, I invite you to learn about your available choices.
When you contact me, I will ask questions about your situation. I want to understand what is creating the pressure. Maybe you are drawing too much from savings. Maybe your mortgage payment is limiting your monthly budget. Maybe you want a line of credit for future repairs or emergencies.
Sometimes a reverse mortgage does not work because the existing debt is too high. I will tell you that, too.
My commitment is to provide clear information without a hard-sell approach. You can take your time, involve your family, speak with your advisors, and decide whether the option fits your goals.
You can also review our pages explaining reverse mortgage eligibility and reverse mortgage payout options.
If you would like to discuss your circumstances, call me at 303-513-2748. I will help you get the facts and determine whether a reverse mortgage deserves a place in your retirement conversation.
