There are several strategies you might wish to consider for improving your cash flow in retirement.
One is the reverse mortgage. Although retirees desiring more cash flow may be attracted by reverse mortgages, they should proceed with care. Consider these scenarios:
* Short stay. Suppose Dan takes out a reverse mortgage and has to move to a smaller place a year later. The loan repayment will be due so Dan will have paid substantial upfront costs for a modest amount of cash flow.
* Long stay. On the other hand, suppose Dan stays in the house for 20 years. The loan balance will keep compounding. When the house is ultimately sold to repay the debt, there may be very little equity left in the house.
Thus, a reverse mortgage might make sense if someone has a need for cash, a desire to keep living in the house, and other assets to leave to loved ones. The healthier you are—and the more likely to remain at home for several years—the more appealing a reverse mortgage might be.
Another cash flow-producing strategy is the immediate annuity, which can offer a return of your investment as well as a return on your investment.
For example, a 65-year-old man might receive over 8 percent per year. By investing $100,000 in an immediate annuity covering his life alone, he would receive over $8,000 per year until he dies. A 70-year old man buying a similar annuity might receive more than $9,000 a year, and older buyers would get even more.
Moreover, each payment you receive will contain a return of your capital, which will be untaxed. This will continue until you have reached your life expectancy, which is about 20 years for a 65-year-old buyer. As a result, the after-tax cash flow might be 7 percent or more.
The catch is that your heirs won’t get anything with this type of single-life annuity. Thus, it pays to put your money there only if you are in good health and expect to receive this cash flow for many years.