Retirement choice: Reverse mortgages vs annuities
Which should you choose — reverse mortgage or annuity?
- Reverse mortgages provide monthly payments backed by the equity in one’s home.
- Annuities provide guaranteed income in exchange for either a lump payment or payments made over time.
Reverse mortgages and annuities are two common retirement tools. Each option comes with its own advantages and disadvantages. When determining which best fits into your retirement plans, take a careful look at the pros and cons to make the best decision.
Taking out a reverse mortgage without fully understanding how it works can be a risky proposition. Though reverse mortgages can be a vital part of one’s retirement planning, it’s important to understand the risks and guard against them.
Reverse mortgages are available to homeowners age 62 and older who have a lot of equity in their home. By taking out a reverse mortgage, the homeowner receives essentially takes out a home equity loan, typically receiving a sum of money in the form of monthly payments, or as a lump sum or line of credit.
The loan must be repaid when the borrower moves out of the home or dies. The loan is often paid back by selling the home. Homeowners who want to leave their home as an inheritance should therefore carefully consider whether a reverse mortgage is worth it. Homeowners who don’t intend to leave the house to anyone may find a reverse mortgage to be an excellent option, however.
Annuities allow one to invest money — either a lump sum or regular payments over time — in exchange for a guaranteed income, potentially for the rest of one’s life, depending on the annuity. There are many different kinds of annuities, each with different features tailored for different investment strategies. But typically, the goal of an annuity is similar to one’s goal when taking out a reverse mortgage: Supplementing retirement income so one can live more comfortably and with greater financial stability.
If you’re just entering retirement, you can opt for an immediate annuity, in which you pay a lump sum and begin receiving payments immediately. With a deferred annuity, on the other hand, you make payments during what’s called an accumulation period. The balance of the annuity grows until you’re ready to start receiving payments.
Annuities can also be an alternative to life insurance. For example, if you have a health issue that disqualifies you from life insurance, you may be eligible for an annuity with a death benefit rider, which guarantees that if the holder of the annuity dies before it is paid out, a chosen beneficiary will be entitled to the proceeds of the annuity. The downside is that the monthly payments will be lower than they would be without such a rider.
Which should I choose?
Reverse mortgages and annuities accomplish similar goals. But which one is right for your retirement plan?
Like so many other financial decisions, the answer lies in your specific situation. If in doubt, consult a financial planner or attorney for advice. And remember, deciding between reverse mortgages and annuities isn’t an either/or proposition — you can choose both. If you have equity in your home in addition to a large sum of cash to invest in an annuity, you can supplement your retirement with two income streams.