I’ve been thinking a lot about retirement recently, and not entirely by choice.
You see, in my mind I’m still 25 with my entire life ahead of me. In reality, I’m 47, and in as little as 10 years I could start drawing my private pension (mental note: set up and start contributing to a private pension).
I’ll be honest, that realisation shocked me. Firstly, how on earth did I get old enough to only be 10 years away from claiming a pension? Secondly, I’ve been self employed for the past 15 years, which means I haven’t had access to a compulsory workplace pension which handily tops up or matches my own contributions.
Throw in two costly children and a career where budgets have halved since the 2008 recession, and my retirement savings are, shall we say, modest.
Which means the thought of retiring and spending the rest of my (hopefully long and happy) life living off my current savings is not a particularly pleasant one. Basic bills and living costs would be covered, but there wouldn’t be much left for the fun stuff in life – travelling, eating out, shopping, socialising with friends.
It was actually the wake-up call I needed. No more putting off the retirement planning until ‘tomorrow’, it was time to figure out how I was going to afford the next half of my life.
I’ve talked about how lockdown gave me the chance to whip the household finances into shape, so now our main focus is on clearing debts and saving every penny we can spare.
We’re also planning to overpay as much as possible on our mortgage so we can pay it off early. Not only will that free us from our biggest monthly expense, but it will also give us more options.
We were lucky to have bought in an area that’s steadily increased in value, and has leapt up again since lockdown sparked a mass exodus from London. This, teamed with our overpayment plan, means we’re building up the amount of equity in our home (the amount of money left over if we sold the house and paid off the mortgage).
What this means in regards to retirement is that we have two options; we can sell the house, buy somewhere cheaper and live off the difference. The downside is that we’d be forced to sell, potentially way before we wanted to, in order to get by. Plus, there’d be no guarantee of finding a cheaper place we actually wanted to live in, that freed up enough money anyway.
Another alternative is a reverse mortgage.
If you don’t know what a reverse mortgages is, it’s a way to release equity without selling your home. Essentially, it’s an advance that assumes your property will continue to rise in value, and is granted according to the current value of your home.
You can use an online reverse mortgage calculator to figure out how much of your home’s equity you’re able to borrow (this value is based on the property’s size, age, location and condition).
If you decided to move forward, you’d use the amount to pay off the remainder of your existing mortgage. You then choose to take the what’s left over as a lump sum, regular payments, or a mixture of the two.
The money released is yours to spend however you wish – you can pay bills, put it in trust for your kids, or blow it all on a trip to Vegas (fun, though not recommended as a sound retirement plan…).
The company that granted you the reverse mortgage essentially has first dibs on the proceeds of your house when it eventually does get sold, plus interest for the length of time you took to pay it back.
You have the right to stay in the home as long as you like, however… the longer you stay the more interest you’ll accrue, which means you (or your family, if you’ve passed away) will end up with less once the property is finally sold.
The big advantage is that you gain access to the money that’s normally trapped in your bricks and mortar until you liquidate the asset by selling. So, you get to enjoy the proceeds and secure your finances AND keep your home in the interim.
The downside is that you’re essentially giving away some of your hard-earned equity in the interest payments that accrue, and you could end up with less or no assets to pass down to your children.
It’s also worth considering that, if you live a particularly long life, you might find you still burn through all the equity money, at which point you’ll no longer have your house as an asset to fall back on.
The final decision probably hinges on how much you want to pass down to your children; if you want them to inherit your home in its entirety, this might not be the best choice for you.
If you want to ensure you have the financial freedom to live out all your retirement dreams, and perhaps also pass on a percentage of the reverse mortgage proceeds to your family so you’re still giving them a financial leg up, this could be the perfect solution.
That’s one way to release equity without selling your home: like all financial and investment options, there are pros and cons. It’s important to do your research to figure out what works best for you, and seek professional advice if necessary.
Good decisions now, will ensure you a great retirement later.
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Photo courtesy of Tierra Mallorca, Unsplash