At some point, our parents may need to use their primary residence as a retirement plan. We, as their kids, need to remove the emotion from these decisions.
Each generation’s retirement years are getting longer, so it could be tough to generate income for 30 to 40 years. This is especially true if they liquid their 401Ks using the 4%.
I’m here to throw out options to spark critical thinking. If you are sentimental about the home you grew up in, this may be a tough article to read.
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What is a reverse mortgage? With a reverse mortgage, the bank gives cash to a homeowner in exchange for the deed upon their death.
If they want to keep the house, the heirs have a small window to pay the loan in full before the bank takes ownership of the home.
Benefits of a reverse mortgage. A reverse mortgage allows homeowners to stay in their homes until death. However, the house cannot fall into disrepair, or the bank can call in the loan.
The homeowners do not have to pay into the loan but must pay property taxes, insurance, and maintenance upkeep expenses.
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Here is an excellent article from Kilpingers and one on the Federal Reverse Mortgage limits. Reverse mortgages have been a sore topic for years, so I encourage you to conduct serious due diligence on this product.
Reverse mortgage for income. Ideally, you and your parents would execute a reverse mortgage to generate revenue.
This decision comes down to a quality of life issue, not an emotional one. Let’s say your parents have about $5,000/month in income between social security and a small pension.
However, they live in San Diego, and the price of food and utilities keeps rising faster than social security cost-of-living adjustments. How will they survive from age 70 to age 90 in this situation?
A reverse mortgage can give them the capital they need to invest AND keep their legacy if done correctly.
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Income done wrong. Most people who get a lump sum of cash spend it down to zero; they need to gain the knowledge to invest wisely.
Let’s say your parents receive $500,000 for the Jumbo reverse mortgage in California. They decide to put it into a savings account and spend $24,000/per year. This scenario gives them an extra $2,000 per month.
At this rate, they will burn through their money in 20 years. With inflation, the $24,000 will become less “real” cash flow each year.
Even worse, they now have no inheritance to leave their kids. The house will go to the bank, and the pile of money will be gone.
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Income done right. However, what if they invest the $500,000 into an income-investing portfolio? I am a massive fan of income investing as it only has one goal: producing income.
Let’s say we receive a 10% dividend yield using the six types of income investing. That would net us $50,000/year or $4,100/month.
Is income investing safe? “There are no risky investments, only risky investors,” from Robert Kiyosaki. If you build the correct mindset, income investing can be very safe.
Yes, when interest rates work against you, your principal may decrease; you may see $440,000 in your accounts. However, you invest for income.
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With $4,100/month coming in, your parents have enough to reinvest $500 to $800 back into the portfolio.
My Wells Fargo brokerage account is my pure income investing platform. Every month this portfolio keeps growing because I reinvest the excess dividends (roughly $300). This strategy works.
Protecting the kids’ interests. The best part is that your parents can protect the kids’ interests using the income-investing method.
Let’s say there are three kids in your family. Before, your parents would split the proceeds of your house three ways.
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However, now they can create three identical income investing portfolios. They can harvest the money while they live but leave each portfolio to a child upon death.
By pre-arranging the portfolios, they ensure no infighting or other madness. Each child knows how much income they will receive and do not have to compete with each other.
When is a reverse mortgage, right? If your parents want to stay in a high-cost-of-living area, a reverse mortgage may be the best option.
Home equity loans and cash-out refinances will create a new mortgage payment for your parents to pay. This may cause more headaches than they are worth.
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If your parents are willing to relocate to a smaller town, sell the home and use the excess cash to create an income portfolio.
Don’t let emotions get involved. Emotions are great when dealing with people but lead to bad business decisions.
Trying to hold onto a house for sentimental reasons can lead to everyone’s downfall. Siblings need to find a way to put the parents’ interests first and theirs second.
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These topics are sensitive, but you can earn the trust of parents and siblings by reading books and talking intelligently.
These are business decisions, and you must treat them as such. You want to ensure your parents have the quality of life they deserve while trying to preserve generational wealth.
Conclusion. There are many ways to deal with aging parents, such as moving them into your house.
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If the math works, an income-investing portfolio can generate an increasing dividend payment while preserving generational wealth.
However, someone needs to understand how to invest. If you give $500,000 to a financial advisor, they may convert it into a 3% annuity—generating $1,200/month.
Ignorance is not bliss. The more you know, the easier your family can thrive. Reverse mortgages get a bad reputation for high fees and shady practices.
However, if the children understand the principles and the purpose, they can be quite valuable. If your parents just get a lump sum and spend it down, then it will be a failure. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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