One way to maximize your social security is using a reverse mortgage to delay taking the benefit until a later time.
The idea is to establish a reverse mortgage line of credit prior to claiming your social security benefit and have it in place ready to use so you can take monthly draws from it and let your social security ripen on the tree in the form of a higher benefit.
Full retirement age, a term created and used by the social security administration, is 67 years of age and enables you to collect 100% of your social security benefit (full retirement ages slightly vary depending on your date of birth). However, you can take social security early, between the age of 62 and 67. Each year you claim social security prior to your full retirement age, your monthly benefit goes down 6% per year. Meaning if you elect to take social security at the earliest age available, 62, you will receive 30% less, 6% less per year, than what you receive at your full retirement age. The annual COLA, or cost of living increase, would be in addition to that plus inflation, so it’s not just a flat 30% over five years, it’s higher. If you still don’t take social security at your full retirement age at age 67 (we are using age 67 for this example), and wait until the latest age, which is 70, you receive an additional 8% for those three years as well as any COLA’s and inflation dollars. All combined you could receive up to a whopping 77% more per month by delaying social security from 62 to age 70. After age 70, there are no more rewards for waiting to claim social security benefits, so waiting past the age of 70, has no monetary growth benefit.
Before I explain how you can maximize your social security using a reverse mortgage, I need to go over a few social security issues first or you can skip to my video that explains how to use a reverse mortgage to maximize your social security, it is very detailed, has an example for a married couple, using social security benefit charts, and reverse mortgage amortization tables. But reading the below information first would be beneficial and explain social security guidelines not covered in the video. Click here to watch.
Not everyone will receive up to the 77% monthly increase by waiting until age 70, it depends on a myriad of factors. The 30% increase between 62-67 and 24% additional increase from 67-70 is part of the existing social security rules, how much the annual social security COLA will be on top of that is the question.
You can also use the social security administration’s calculator to get an idea of your monthly benefit. It establishes a starting point but by no means is it 100% accurate. After you select a social security benefit that corresponds with the year you would like to start your benefits, add in any other anticipated income you will be receiving between the age of 62 and 70 years of age. A few things to note before arriving at your total monthly income. If you intend to keep working at age 62 and claim social security concurrently, there is cap on how much income you can make before your social security benefit gets reduced. For the year 2023, the maximum income you can earn individually without any experiencing any social security penalty from age 62-66 is $21,240 or $1770 per month. Each year it goes up by roughly 1/2%. The calendar of your full retirement age year, in this example 67, in 2023 the maximum income one person can make in that particular year is $56,520 or $4710 per month. The following calendar after your full retirement age year 67, there is no more earnings limit, the sky is the limit, you can take social security and work concurrently with no penalty.
There is a social security Grace Year which is the first year you take social security benefits when prior to your full retirement age. The earnings test becomes a monthly and annual test only for the during the first calendar year. Here’s the way it works. If Joe elects to retire in July of 2023 at age 63, he can make as much income as he can prior to taking social security in that same year. From January to June, there is no earnings test since he is not yet drawing social security. Once Joe starts taking social security, for his individual situation he can’t make any more than $1770 in gross income for any one month between July to December of 2023 while taking social security. The following calendar year at age 64, it’s an annual earnings test to the maximum for that year. The maximum dollar amount for the earnings test for 2024 will get announced during the 4th quarter of 2023. The Grace Year monthly earnings test can be difficult for commission earning people where it’s possible no income may be earned from July to October, but lump sum commission checks may arrive putting them over the monthly limit of $1770. If during the Grace Year you go over the $1770 , in this example from July to December of the first year claiming social security, which is the amount for 2023, you have to give back every penny of social security benefits for each month you go over $1770.
During the earnings test calendar years following the social security Grace Year if you go over the annual maximum earnings limit, for every $2 you earn over the limit, you lose $1 of social security benefits. In the calendar year you reach social security’s full retirement age year, the earnings limit only for that year as of 2023 as mentioned above is $56,520 and for every $3 over that figure, you owe $1 as a penalty. If you don’t advise social security of the overage, you will have to manually pay it back, or have benefits withheld until the penalty is met. If you know you are going to be over, it’s best to call the social security administration office and let them know since sometimes it can take years for them to catch this and it can become a mess. In short, you do not want to be in this situation.
Also very important, if you once worked for an employer or employers who contributed to social security and now you work for an employer who does not contribute to social security, there is a social security WEP penalty and possibly a social security GPO penalty that will negatively impact your social security benefit, and that penalty is not listed on your social security estimated benefit you receive in the mail. It’s important you know the WEP penalty for your own individual social security benefit as well as the GPO penalty for the spousal benefit, they are different and you need to know, before you decide which year you opt to take social security.
Now that you have added your selected anticipated social security benefit added other monthly or annual anticipated income together, you will need to establish how much in monthly income you need to live comfortably. Do not skimp on this dollar amount, be liberal. You may want to travel, do some upgrades on your home, buy a new car etc…. Next add in your monthly debts, including any and all monthly consumer payment debt, property taxes, homeowner’s insurance and association fees (if applicable) for each property your own. If you were reimbursed for meals by your employer, add those back in as debts and again don’t skimp, aim high with these debts. Also, if you are responsible for your own healthcare expenses, before claiming Medicare, add those in too.
See if your estimated income will cover all your expenses, if so, you are in great shape! But if not, do not fret or re-do any figures or start cutting from your lifestyle to bring the numbers down.
Here’s where the reverse mortgage line of credit comes in. In the video version I made of this example, the couple is $3143 short each month on making ends meet for the first five years. The FHA HECM, home equity conversion mortgage, line of credit can be established to bridge that gap each month. One huge cash flow advantage is that the reverse mortgage eliminates the first mortgage payment of $2500 as shown in the video version. No monthly mortgage payments are required on a reverse mortgage. The trade-off is each month the interest and charges that goes unpaid, gets tacked on to the balance of the mortgage and gets collected once the home is sold or the loan is refinanced. But as you see in the video version amortization table, the couple do make voluntary partial payments on the reverse mortgage loan after age 70 due to additional income entering into the picture.
Once the married couple reach their optimal deferred social security monthly benefit, they can stop taking reverse mortgage line of credit advances at any time. The reverse mortgage line of credit, in this example, serves as a temporary bridge until additional income comes into play at a later time, such as reaching the desired social security benefit, RMD, investment portfolio withdrawal, or earned income. Depending on what your social security benefit report shows, you may want to start taking social security at your full retirement age instead of waiting until 70, it depends on the social security administration calculator numbers. Some people have required RMD’s they have to start taking at age 72, and that additional income may eliminate the need for the reverse mortgage monthly line advance, or… the reverse mortgage may be needed to pay the tax generated from the RMD withdrawal (if taxable). Or, in a down stock market year, on investment portfolios like 2022, you may opt to skip your 2023 annual withdrawal and leave it where it is to give it time to regenerate and take from the reverse mortgage line of credit instead and then re-evaluate in 2024 to go back to drawing from your investment portfolio. The FHA HECM reverse mortgage line of credit becomes a financial Swiss Army Knife or sorts. I have another video that demonstrates how to use the reverse mortgage line of credit in down market years.
The reverse mortgage line of credit does have interest and charges that accumulate over time and whatever portion not paid gets tacked on to the balance of the loan. I cover this in more detail in the video version with an amortization table. To some people using locked up equity in their home to enable a more comfortable daily quality of life is more important than the accruing interest and charges and more important than leaving every penny of equity in the form of an inheritance for their heirs. These people are using it for themselves, after all it is their equity.
Keep in mind in today’s rate and economic environment (late 2022), a reverse mortgage line of credit will only lend a total of 35-45% of the home’s equity, factors depend on the age of the youngest borrower, appraised value of the home and prevailing interest rates and the minimum age is 62 to qualify for a FHA HECM reverse mortgage line of credit loan. There are other reverse mortgage line of credit options that are non-FHA HECM reverse mortgages, the minimum age is 55 to qualify and a line of credit option is available, I have a video on my YouTube channel that compares reverse mortgages. Fees are less expensive on the non-HECM reverse mortgages and loan amounts can go up to $6 million but the interest rate is higher and there are some important differences versus a HECM, I have another video that compares the two. As rates go higher, loan amounts go lower and we are in a rising rate environment right now, (late 2022) but home values are still strong, so it doesn’t pay to wait for rates to come down on a reverse mortgage. If home values start to decline while waiting for rates to come down, that will further erode your approved loan amount.
To maximize your social security using a reverse mortgage line of credit may not fit everyone’s family dynamic or economic preference. But the reverse mortgage line of credit gives people who want or need to retire early or claim their benefits prior to their social security full retirement age, an option to do so and create additional cash flow. By eliminating the first mortgage payment and establishing a line of credit (if enough equity), gives the ability to fill the cash flow gap by taking monthly advances from the line of credit, all the while deferring their social security to a later date. Are the reverse mortgage expenses worth paying for the immediate additional cash flow? The answer can’t just be numbers driven or checking the break-even chart shown in the video. Quality of life is the other side of the coin and is just as important, if not more so especially early in retirement when people may be in better health, have more energy and want to create additional life experiences.
Check out the video version of this scenario, a more detailed married couple example with reverse mortgage line of credit amortization tables and custom social security tables are there with a little humor sprinkled in as well and feel free to contact me with any questions or concerns in regards to the content of this article.
Best,
KW