Most people approaching retirement plan to rely on Social Security payments for at least part of their retirement income, and they also realize that the longer they wait to claim those benefits, the bigger their monthly Social Security check will be. And, thanks to inflation, that payment will be even bigger starting in 2023, when the average Social Security payment gets a cost of living adjustment of more than $140.
There’s just one problem: What if you can’t afford to wait?
There’s a nifty technique that can help create a Social Security bridge strategy that allows them the ability to wait to draw down on their Social Security. For more help planning a Social Security bridge strategy in the particularly complicated environment, consider matching with a financial advisor.
What Is a Social Security Bridge Strategy?
Over all, the monthly Social Security benefit amount increases by 8% for every year you wait to claim benefits. For example, the maximum benefit amount in 2022 for a 62-year-old early retiree is $2,364. At the full retirement age of 66, the benefit rises to $3,240 and at age 70 the payment maxes out at $4,194. The difference between collecting at the full retirement and waiting until age 70 comes out to more than $11,000 a year.
People who need to retire at 66 or even 62 don’t need to miss out on the higher payments if they can find another source of income to tide them over until their maximum benefit payment kicks in. For some fortunate people, this kind of bridge to Social Security could be produced by withdrawals from investments and savings, while anyone lucky enough to collect a good-sized pension also could afford to wait. Another option would be purchasing a simple annuity to provide income.
All that, however, assumes a younger retiree has access to some asset, or combination of assets, significant enough to allow them to forgo Social Security payments for as long as eight years.
Using a Reverse Mortgage as a Social Security Bridge Strategy
But thanks to the startling increase in home values, many homeowners already sit on a sizable amount of home equity that could be tapped through a reverse mortgage. The average mortgage holder in the U.S. has accessible home equity of $185,000, which amounts to 80% of total home equity.
A reverse mortgage allows homeowners to cash in on their home equity to use as income without having to make a loan payment, as they would have to do with a home equity loan, as long as the home is their primary residence. When the homeowners move out or pass away, the property passes, the home is sold to repay the loan balance, with any remaining amount passed on to the homeowner’s estate.
The option for a reverse mortgage might be more attractive now that the stock market is down, as Christian Mills, head of financial advisor relations with Reverse Mortgage Funding, explained to ThinkAdvisor.com
“It is really appealing to think about taking income from your home equity rather than having to make withdrawals from the 401(k) plan when it is down 25%,” Mills said.
Reverse mortgages have significant pros and cons, and have been exploited by scam artists, but they can be a useful retirement and estate-planning tool. Constructing a bridge strategy using a reverse mortgage should be done with a financial advisor who can help calculate the overall impact on the homeowner’s full financial situation and retirement plan.
A guide to the details and conditions of reverse mortgages is available from the Consumer Finance Protection Bureau.
Bottom Line
Tapping into home equity through a reverse mortgage can be an effective Social Security bridge strategy, a way for Americans to delay drawing down on Social Security in order to receive more robust payments in the future.
Tips on Retirement
- Maybe you need a financial advisor to help you determine whether or not to obtain a reverse mortgage. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor, get started now.
- Before you consider reverse mortgages you should get a solid estimate of whether you have the resources to retire – without the income of a reverse mortgage. Use our free retirement calculator for a quick estimate of that figure.
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