One of the biggest concerns you'll face after you retire is trying to figure out where to get the money needed to pay your bills. With all the turmoil in the financial markets recently, you may wonder if you can generate any income from what's probably your biggest asset of all: your home.
The retiree's dilemma
After decades of saving with the primary goal of strong growth, without having to worry much about making withdrawals or living off portfolio income, retirees often find themselves suddenly having to reposition their investments toward much different goals. Principal protection and investments that provide regular cash flow become far more important than capital appreciation.
Yet in today's investing environment, finding dependable income can be tough. Risk-free investments like bank CDs and Treasury bonds pay relatively low rates and can leave you exposed to the possibility of long-term inflation down the road. You can sometimes do better with corporate bonds -- five-year notes issued by Simon Property Group (NYSE:SPG) and International Paper (NYSE:IP) pay a bit over 5% -- but you take on default risk to get those extra yields. And while dividend-paying stocks can be a great solution for many investors, big dividend cuts from blue-chip companies including Pfizer (NYSE:PFE), General Electric (NYSE:GE), and Dow Chemical (NYSE:DOW) earlier this year don't inspire much confidence.
Tapping your home
In the most recent issue of the Fool's Rule Your Retirement newsletter, Foolish retirement expert Robert Brokamp takes a closer look at how to deal with your home as a retirement asset. One possible strategy he talks about for generating income is to take out what's known as a reverse mortgage.
The idea behind a reverse mortgage is that instead of making monthly payments to your mortgage lender, your lender instead makes money available to you, either through fixed monthly payments or through a more flexible line of credit. The Federal Housing Administration's (FHA) government-insured reverse mortgage program extends credit through private lenders including Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC). Homeowners age 62 or older are eligible, but the program typically requires that you have little or no mortgage debt outstanding on your home.
One of the primary benefits of FHA reverse mortgages is that your lender won't require that you repay the loan for as long as your home qualifies as your principal residence. Only after your death, or if you sell the home or move elsewhere, does the loan become immediately due. In addition, if there's a shortfall when the home is sold, then under the FHA program, the government covers the difference. Conversely, if there's money left over from the sale, it goes back to you or your heirs.
Is there a downside?
As good as the reverse mortgage program sounds, there are drawbacks. First, you typically can only borrow a portion of the home's value; the younger you are, the less you'll get. In addition, fees can be substantial -- significantly greater than what you might be used to with traditional mortgages.
Nevertheless, a reverse mortgage is one option to consider if you need to generate more income in retirement. Combined with managing your investments to maximize income, a reverse mortgage may give you enough flexibility to close the gap between your investment income and what you need for your living expenses.
If you want to learn more about reverse mortgages, you'll want to take a closer look at our Rule Your Retirement service. In addition to Robert's article in the most recent monthly issue, you'll also find our latest special report, "How to Rule Your Real Estate," which includes a feature on reverse mortgages and the best way to incorporate them into your financial planning during retirement. Although it's exclusively for subscribers, you can click here to get a free 30-day trial that will give you full access.
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