CFPB on Delaying Social Security With a HECM Reverse Mortgage
September 14, 2017
Seniors of 62 can begin receiving social security at 62, or
wait before applying in order to draw a larger amount. For
example, a social security payment of $910 a month starting
at age 62 becomes $1300 starting at age 67. If a homeowner
can’t afford to wait before drawing more funds, she can take
out a HECM reverse mortgage to bridge the gap. Many
retirement counselors, including me, have recommended that
strategy.
The strategy has recently come under fire from a highly
reputable source: the Consumer Financial Protection Bureau
(CFPB):
“The Consumer Financial Protection Bureau (CFPB) today
issued a report warning older consumers about taking out a
reverse mortgage loan in order to bridge the gap in income
while delaying Social Security benefits until a later age.
The CFPB report found, in general, the costs and risks of
taking out a reverse mortgage exceed the cumulative increase
in Social Security lifetime benefits that homeowners would
receive by delayed claiming.”
CFPB has performed a public service by raising this issue.
In evaluating it, however, it makes the same fundamental
mistake that I made, which is to formulate the same advice
for everyone. I have since come to understand that sensible
advice on this issue has to be borrower-specific. While CFPB
is right that delaying social security is a mistake for some
seniors, there are many for whom it makes good sense. I will
expand on this point below.
CFPB’s methodology is to compare the costs of a HECM to the
cumulated increase in social security payments from the age
of 62 to 85. Implicitly, it assumes that the borrower is
planning to sell his house at some point within that period,
and is therefore only concerned with her equity. CFPB
ignores seniors who intend to remain in their homes
indefinitely. Further, the spendable funds available to the
borrower do not enter the analysis at all, even though this
is the major driving force inducing seniors to take out
HECMs.
My colleague Allan Redstone and I recently completed the
development of a
general retirement model (which you can download by clicking here) in which HECMs are
included, along with other income sources including
financial assets generating a return. The model allows the
user to stipulate a desired monthly draw of spendable funds,
with draws from the HECM or from the financial assets
serving as residual sources, calculating the user’s estate
value in every month. It turns out to be the perfect tool
for examining whether it makes sense to delay taking social
security.
Consider a senior of 62 who has a nest egg of $450,000
yielding 4%, and a home worth $300,000 appreciating at 4%.
Her only sources of spendable funds are social security,
withdrawals from an investment account, and monthly payments
from a HECM reverse mortgage, which continue for as long as
she resides in the house. From these she elects to draw
$4,000 a month. Given these assumptions, we ran the model
twice, once assuming that the senior took social security of
$910 starting immediately, the other assuming that she took
$1300 beginning at age 67. We compared estate values
(financial assets plus home value less HECM loan balance) at
different ages, and we looked at how long the $4,000 payment
lasted.
We found that the estate value was higher on the immediate
$910 option at ages 70, 75, and 80. At 85, the estate values
were the same. At 90, the value was higher on the delayed
$1300 option. We also found that with the immediate $910
option the $4,000 payment lasted until age 90.5 years, at
which point assets were depleted, whereas with the delayed
$1300 option, asset depletion did not occur until age 92.0.
Our conclusion? If this borrower intends to remain in her
house indefinitely, she should delay taking social security
until she reaches 67. If she expects to move out of the
house, she should take social security at 62.
The case described above is unique; no two seniors face
exactly the same decision process. The best approach,
therefore, is to avoid generalities and base advice on the
specifics of each case. CFPB would make an important
contribution if its web site offered means by which any
senior could assess the social security timing decision –
not to mention a host of other decisions -- based on the
specifics of her situation. As I noted earlier, I have a
retirement calculator that does exactly that, which I would
be glad to license to CFPB for placement on its web site at
no charge. All it has to do is ask.
