Retirement & Financial Planning Report

Reverse mortgages allow homeowners to tap home equity even if they can't sell their home. Image: pogonici/Shutterstock.com

While hopefully your plan for funding your retirement will provide what you need, you may find that you have needs for cash that it isn’t meeting, even after you have taken steps such as cutting back on spending. If going out and earning more income isn’t an option, where to look?

You may have several sources of cash available to you that you had not considered, although using them to fund your retirement should be done only after careful consideration.

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One such source is your home. One approach for retirees traditionally has been selling their homes and moving into a smaller home, then pocketing the difference. There are many variables to how well this would work for you, ranging from your personal needs and preferences to the state of the housing markets where you live and where you want to move, if different.

An alternative is reverse mortgages. They allow homeowners to tap home equity even if they can’t sell their home. With a reverse mortgage, a homeowner (usually 62 or older) borrows against the equity in the home and receives regular payments. Those payments are tax-free, just as the proceeds from any type of loan are not subject to income tax.

Although a reverse mortgage is a loan, you are not required to repay anything until you sell or vacate the home. You must remain current on your tax and insurance payments, though. When a reverse mortgage borrower sells the house or dies, the lender will be repaid, plus interest. Typically, repayment will come from the sales proceeds.

Reverse mortgages have upfront costs, paid by the borrower. Therefore, borrowers should intend to stay in the house for a while, after getting a reverse mortgage, to justify paying the initial charges.

Another potential source of cash is a life insurance policy you no longer need. Perhaps your kids are finished with school and living independently. You might not want to keep paying the premiums.

One possibility is to surrender your policy. If it has cash value, you may wind up with some money. Another option is to sell your policy. This type of transaction is called a life settlement. Institutional investors buy pools of such policies and keep paying the premiums while awaiting a payoff.

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