Advertisement

Taking out a reverse mortgage may help if coronavirus wipes out your job

Reverse mortgages allow borrowers to tap into their home equity to obtain cash. Above, restored homes behind Echo Park Lake.
(Cheryl A. Guerrero / Los Angeles Times)

Dear Liz: I read with interest the letter from the person who was a tour guide and lost their job due to the virus. I kept reading, expecting you to suggest a reverse mortgage. Are these a bad idea?

Answer: Not necessarily. The person in question owned the home with a sibling, and the sibling did not live in the home, which could complicate the process of getting a reverse mortgage.

If there was substantial equity in the home, however, a reverse mortgage could pay off the existing mortgage and might be worth the effort. One way to investigate this option is to talk to a HUD-approved housing counseling agency.

The benefits of delaying Social Security

Dear Liz: I retired and started collecting Social Security at 62. My husband is currently 68 and plans to retire next year. I called Social Security before I retired and they told me that I could collect Social Security at 62 and when my husband retired, I could collect my own Social Security or half of my husband’s, whichever was greater. Is this accurate? I should have done more research before taking my benefit as I’m not sure this is true.

Advertisement

Answer: It’s true. There’s a substantial penalty for starting early, and most people are stuck with a permanently reduced payment, but your situation is one of the potential exceptions.

You weren’t eligible for a spousal benefit at 62 because your husband hadn’t started his benefit. When your husband does start, the spousal benefit will be half of what he would have received had he applied at his full retirement age of 66. If you’re younger than your own full retirement age, the spousal benefit will be reduced to reflect the early start. If all those calculations result in an amount that’s more than what you collect, you’ll get the larger amount.

By waiting to start benefits, your husband gets delayed retirement credits equal to 8% for each year he has waited past his full retirement age. Spousal benefits don’t qualify to share those credits, but survivor benefits do. When one of you dies, the smaller of the two checks you receive as a couple goes away and the survivor receives the larger of the two benefits. The survivor’s check will be larger because your husband waited to apply.

Advertisement

This is why it’s so important for the larger earner in a married couple to delay filing for as long as possible. The higher earner’s benefit determines what the survivor will have to live on, often for years and sometimes for decades, after the first spouse dies.

IRA confusion leads to disappointment

Dear Liz: Many years ago, I read in a personal finance magazine about a mutual fund company that paid $1 million to a customer who had an IRA for 40 years. So I started an IRA at that company in December 1992 and paid $10,000. As of today, that account is worth only $80,000. What happened to the high payoff?

Answer: First things first. The maximum you were supposed to contribute to an IRA in 1992 was $2,000. If you were able to contribute more, you may have opened a different type of account, such as a regular taxable brokerage account. Either that or you have some explaining to do to the IRS.

Also, IRAs hadn’t been around for 40 years in 1992. They were created in 1974 by the Employee Retirement Income Security Act. So what you probably read in the magazine was a hypothetical example of what someone might accumulate over time in an IRA. Someone who contributed $2,000 a year to an IRA for 40 years could wind up with $1 million, but only with returns in excess of 10%.

Advertisement

Actual returns historically have been closer to 8%, but that’s an average. Some years it’s less, some years it’s more. There are no guarantees. What you end up with depends on how you invested the money and what fees you paid, among other factors. If your investment had done as well as the broader stock market, as measured by the Standard & Poor’s 500, you would have over $100,000 by now.

If your money is in an IRA, you could move it to be a better investment, such as a low-cost, broad-market index fund, without tax consequences. If it’s not in an IRA, then selling the investment to buy another could generate a tax bill, so consult a tax pro before taking any action.

Liz Weston, Certified Financial Planner, is a personal finance columnist for NerdWallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.


Advertisement