Should You Use Your Home’s Equity to Delay Social Security?
Did you know that consumers between the ages of 62 and 70 can earn up to 8% more in Social Security for each year they delay taking disbursements? It sounds great at face value to get more money in the long run, but many people in this age bracket need that Social Security payment each month to supplement their income. They may have retired already and are living on a fixed income through a retirement fund, or they may still be working hard to support themselves and/or their families. You can see why it might be difficult for consumers to delay their Social Security payouts. To help put off taking their disbursements, some homeowners in this stage of their lives have been known to borrow against their homes’ equity through a home equity conversion mortgage (HECM), more commonly known as a reverse mortgage. In fact, some lenders even promote this tactic.
The Consumer Financial Protection Bureau, however, has something to say about it. The CFPB warns consumers that the cost and risk of a reverse mortgage is greater than its benefit. In fact, says the CFPB, withdrawing home equity in this way could limit a homeowner’s options if they decide to move or have a financial setback. “A reverse mortgage loan can help some older homeowners meet financial needs but can also jeopardize their retirement if not used carefully,” says CFPB Director Richard Cordray. “For consumers whose main asset is their home, taking out a reverse mortgage to delay Social Security claiming may risk their financial security because the cost of the loan will likely be more than the benefit they gain.”
Other financial experts disagree with the CFPB’s take on this strategy, however, and call it a plausible option. In an article written for Forbes, Jamie Hopkins, co-director of the American College’s New York Life Center for Retirement Income, writes, “The CFPB’s analysis, misrepresentations, and inaccurate conclusions fail to provide a comprehensive review of potential benefits of Social Security deferral and proper use of home equity. Instead, the report unleashed an overly broad and inaccurate censure that could hamper meaningful discussion.”
Retirement researcher Wade Pfau gives a detailed rebuttal of the CFPB’s findings as well. “I am disappointed that this report was issued and heralded with a press release and other promotion by the CFPB,” says Pfau. His post gives multiple mathematical examples of what can happen to a homeowner’s portfolio if they do decide to delay Social Security with a reverse mortgage. Pfau challenges the CFPB’s report and suggests that there is value in the strategy.
“Using a HECM [home equity conversion mortgage] to fund Social Security delay does not create greater risk for retirees experience spending shocks or needing to move later in retirement,” Pfau writes, “because reduced distribution needs from the investment portfolio and the subsequent reduction in sequence risk offset the reverse-mortgage costs and preserve overall net worth.”
Hopkins and Pfau may both disagree with the CFPB’s blanket statement, but they agree that this financial strategy should be judged on a case-by-case basis. Every homeowner has different circumstances; there’s no one financial planning strategy that will fit all of the people all of the time. The key to successfully cashing in on the benefit of delaying Social Security is to consult your financial planner. Together, you can look at the facts and fill in the blanks with your personalized details. Don’t take a blanket statement at face value. Let the experts help you decide whether taking advantage of your home’s equity is the right choice to help you defer Social Security payments and get that extra 8% in the end.
