It is generally well known that beginning Social Security income payments prior to full retirement age results in a lower monthly benefit. The penalty seems stiff: a permanent 30 percent reduction in payments if you start receiving checks as early as the law allows. That means someone who would be entitled to $1,000 per month at age 67 would get only $700 each month for life if they chose to start at 62.
Meanwhile, an interesting and potentially powerful borrowing tool has entered the mainstream: the reverse mortgage. Used properly and judiciously, this product can be a godsend for retirees with equity in their homes who need to unlock funds without taking out a traditional mortgage or selling their house.
So it was inevitable that someone would combine the two concepts and suggest a seemingly elegant solution: use the cash from a reverse mortgage to delay the onset of Social Security benefits until full retirement age.
So, is this really a good idea? Sorry to disappoint, but probably not. Given the uncertainties involved and the costs of a reverse mortgage, the potential gain is limited at best and depends upon beating the odds of the life expectancy tables. Even then, the marginal advantage is probably not worth the effort.
A reverse mortgage can be an excellent device for transforming equity locked up in a home to use for monthly expenses, repairs and maintenance, even paying off existing debt. Of course, like any type of loan, borrowers must understand the product thoroughly and use it with care. But today's government-guaranteed version known as the Home Equity Conversion Mortgage is safe, reputable and powerful when utilized appropriately.
However, taking cash out of your home with an HECM to tide you over while you run out the clock from 62 to full retirement age is probably not a prudent choice. To see why, let's look at how your Social Security benefits are determined.
The age at which you are entitled to 100 percent of your designated retirement benefits has increased over time as more retirees live longer and the Social Security system began running a deficit. Today, that means age 67 to claim the full benefit. But, you still have the option of starting any time after reaching age 62, at a permanently reduced level for life.
On the other hand, you may choose to hold out for age 70 and earn a permanent 8 percent raise for each additional year. On the surface, delaying seems to be the best strategy for maximizing your take from Uncle Sam (and from all those Millennials still paying into the system).
Not so fast, though. Social Security payments are designed to be "actuarially neutral" regardless of when you flip the switch. Huh?
The schedule is calibrated so that a recipient of benefits would realize the same total amount (in present value terms) regardless of what start date is selected, assuming the beneficiary lives exactly as long as the actuarial tables predict. That's roughly 86 for a woman and 84 for a man.
You would have to substantially outlive your statistical life expectancy to realize a significant advantage from waiting.
If you have good genes and long lifelines in your clan, it could make sense to borrow against the house to delay the onset of Social Security. For the average person, not so much. Keep the reverse mortgage in your hip pocket for a rainy day in the future.
A reverse mortgage can be a valuable tool, even a life-saver in the right circumstance. Stalling your Social Security checks is probably not one of them.
Christopher A. Hopkins, CFA, is a vice president and portfolio manager for Barnett & Co. in Chattanooga.