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Learn About The Many Types Of Retirement Income Generators

edited June 2020 in Other Investing

Learn About The Many Types Of Retirement Income Generators

There are many types of retirement income generators (RIGs) that each produce different amounts of retirement income. My Retirement Income Scorecard compares the amounts of retirement income that are possible for 10 different RIGs, which is one consideration for choosing a RIG or combination of RIGs to build your retirement income portfolio.

Social securities
Fixed incomes products
RMD from 401k
Bond and bond funds


  • beebee
    edited June 2020
    I'll add these RIGs:
    Part-time work
    Rental property
    Sell your Crap (your wife will love you)
    Spend time simplifying your bills (this is a Income enhancer through lower bills)
    Remind your Kids to get a Job...and their own apartment!
  • edited June 2020
    Reverse mortgage - Tom Selleck says he trusts them.
    YouTube channel (!)
    Are dividends and cap gains listed?
  • beebee
    edited June 2020
    @Rbrt, A reverse mortgage is on my "things to do list" for my 62 birthday (earliest age). Instead of using it as a tenure payment I plan on letting the equity glide path value grow. Establishing an HECM is great way to hedge inflation risk and sequence of return risk amoung other risks. Wade Pfau is a bit better than Tom Selleck on the subject.

  • @bee: Corrected Pfau link

    While I'm generally a fan ofr Dr. Pfau, ISTM he skipped over some details and created some misimpressions. The first is that he appears to use HECM and "reverse mortgage" synonymously. Rather, an HECM is but one of three types of reverse mortgages. Being the most common type, and the one backed by HUD and providing some government protections, it is the type I'd likely look at first. But different types do exist, with different benefits, costs, and risks.

    "With a HECM, the home title is never turned over to the bank." Okay, but so what? One has the same risk of foreclosure regardless of who holds the title. When you buy a home, do you care whether you take out a mortgage (where you keep title), or you borrow the money using a deed of trust (where the trust gets legal title)? While foreclosure procedures differ, you're still subject to foreclosure either way.

    FWIW, here's what the FTC says about title: "In a reverse mortgage, you keep the title to your home. That means you are responsible for property taxes, insurance, utilities, fuel, maintenance, and other expenses." Of course you'd expect that in any case.

    "They need to have full equity in the home; there can’t be any other lien on the property." HUD begs to differ on HECMs: "You must ... Own the property outright or paid-down a considerable amount"

    Dr Pfau gives four different approaches to managing sequence of return risk (I've cited this before). One is to use a cash buffer.. He describes three different ways of implementing that approach, one of which is to use a reverse mortgage line of credit. What I haven't seen him discuss (perhaps I have not looked hard enough) is why he advocates using a HECM over other types of reverse mortgages, let alone other types of credit.

    ISTM that if you're looking at this for use as a cash buffer - a line of credit for a temporary loan that you might never call upon - a HELOC with lower up front costs could have lower total costs. OTOH, if you're thinking of using a reverse mortgage for something else, then you might still expand your search beyond HECMs. The FTC writes:
    If you’re considering a reverse mortgage, shop around. Decide which type of reverse mortgage might be right for you. That might depend on what you want to do with the money.

    Dr. Pfau mentions using reverse mortgages as a SS bridge (to delay benefits). A 2017 "CFPB report found, in general, the costs and risks of taking out a reverse mortgage exceed the cumulative increase in Social Security lifetime benefits that homeowners would receive by delayed claiming."

    Finally, the "gotcha" that concerns me with reverse mortgages (and I like the idea of reverse mortgages if obtained at reasonable cost and rates for a well defined purpose), is that you have to pay the money back when you move. How do you buy a new home if you have spent down your equity? It looks like there is a risk of being locked into your home for life, because you won't have enough equity left to move anywhere else.

    Consumer Financial Protection Bureau: What happens if I have a reverse mortgage [HECM] and I want to sell my home?

    HECM risks and disadvantages (citing CFPB):
  • @msf,
    Thanks for the fix and the thorough evaluation of reverse mortgages.

    You stated:
    ISTM that if you're looking at this for use as a cash buffer - a line of credit for a temporary loan that you might never call upon - a HELOC with lower up front costs could have lower total costs.
    I agree the costs of opening a reverse mortgage are much higher than a HELOC, but banks were freezing or cutting these HELOCs during the 2008 recession. A reverse mortgage can not be "called in".
  • Point taken. There are risks and costs with every approach. You pays yer money and you takes yer choice.
  • @bee,
    I am a longtime user of helocs and my current one is ~$300k @2.4% fixed, so of course I am considering taking 4/5 of it and sticking it into VONG :)

    Anyway, I write to point out that, recessions and calls aside, helocs have expiration dates (mine have, anyway), and typically entail an initial draw as well in order to get best terms. So it's not necessarily simply opening a line and letting it sit idle for use much later on.
  • helocs ... typically entail an initial draw as well in order to get best term

    With any of these financial "products" you're effectively buying insurance. There are a whole range of possible terms with different tradeoffs of costs, risks, benefits. How likely are you to draw on the line of credit? How long are you going to need that loan? How much sunk cost are you willing to spend to mitigate the risks, and how much risk (how large a draw, certainty that the line is there when you need it) do you want to "insure"?

    Do you want/need a higher line of credit that a proprietary reverse mortgage could provide above a HECM? Is it worth giving up some of the government protections that come with a HECM?

    So it's not necessarily simply opening a line and letting it sit idle for use much later on.

  • beebee
    edited June 2020
    With respect to the reverse mortgages, the line of credit actually grows over time regardless of the home's value. This seems quite different than the dynamics of a HELOC. Am I missing something?

    Here is a more detailed explanation of the growth of the credit line for a reverse mortgage.
    Scroll down to the "Growth Rate Feature" section (of this site)

    Also, a chart comparison between HELOC and Reverse Mortgages:
  • edited June 2020
    Can’t get over the fascination with “income” in an extremely low rate environment where U.S. government AAA paper is yielding practically nothing (0.65% this morning on a 10-year bond). Let’s go out a bit on the credit spectrum and assume maybe 2% on a top tier cooperate bond. If you expect those returns to put food on your table over time - best plan to plant a garden.

    Don’t get me wrong. More highly speculative bonds can be held or “played”, along with income producing equities, as part of a broader plan, but the income thrown off from those isn’t the “Steady Eddy” guaranteed stream from month-to-month most would desire or expect in an income generating vehicle. Expect dry spells along the way if going lower down on the credit ladder.

    What seems clear (to me anyway) is the importance of diversifying into an assortment of asset classes, which working together can produce more or less reliable capital appreciation over time. There will be dry spells of course. Think like the major hydro-electric players do and build in some “peak demand reservoirs” you can open the spickets on during those dry times, draw down, and than turn the spickets back off and let the reserve slowly build back up to full capacity during better times. Some use cash as that reserve. But it needn’t have to be cash.

    Think of portfolio construction as: low risk (relatively stable) components, moderate risk components, value-based components, and growth / speculative components. The latter two will stand you well when the flood gates are wide open and the waters sre surging. David is intending to review TMSRX in the July Commentary . Before going “hog-wild” loading up on income funds that return pennies on the dollar, take a look at that one to see where might fit in. I wouldn’t buy an old favorite TRRIX right now, but there’s a fund that originally was named “Retirement Income Fund” (despite maintaining a 40% equity allocation) - just to show you how the definition and approach to income generation may be expanded.

    Added : Reverse mortgages as an income stream? I guess. But it would be hard to call one “income generating” since in essence you’re “Robbing Peter to Pay Paul“. Net-Net the lender gains and the borrower ends up with little or no home equity. To me, home equity is an asset just like a stock, bond, ounce of gold, mutual fund, etc. Don’t misunderstand me. For some people they may make sense. Just questioning how they’re apparently being viewed here.

  • Please don't misunderstand me. I like the idea of reverse mortgages if obtained at reasonable cost and rates for a well defined purpose, as I wrote above. They have gotten a somewhat undeserved bad rap, and they've been improved significantly. They're likely superior for a variety of well defined purposes.

    But @bee raised HECMs as a great way to hedge sequence of return risk. For that particular well defined purpose, they may not be the better product. ("Hedge" = "insurance" or "protection".)

    Sequence of return risk is the risk that one's decumulation (spend down/retirement) phase may begin during a market downturn. It's not a risk of ever having a market correction. So a hedge against this risk is protection that's needed during the first few years of retirement. This has a few implications:

    1. Sequence of return risk is not concerned with what happens after, say, 10 years. So it doesn't matter that a HELOC only enables you to draw against your line of credit for 10 years. Like term life, that's the period that you're "insuring".

    2. Since you're only "insuring" for a relatively short period (say, 1/3 of your anticipated retirement period), the fixed (up front) costs of the line of credit weigh more heavily. They are amortized over just a few years, as contrasted with closing costs on a traditional 30 year mortgage. (They also weigh more heavily because you pay these fees even if you never need to draw upon the line of credit.)

    3. The amount of protection you need is capped by your anticipated expenses over the first few years of retirement. So the fact that a reverse mortgage credit line grows doesn't matter. (The fact that it might shrink with a HELOC does matter, however.)

    4. Since this "insurance" is needed at the point of retirement, one might be able to apply for the line of credit shortly before retirement, thus making it easier to qualify for a HELOC.

    In a sense, the whole question of how easy it is to get a HELOC is irrelevant to the question of which one is better. If you cannot get a HELOC then there is no choice to be made.

    Permit a metacomment here: I've been fastidious in citing objective third party sources: the FTC, HUD, the CFPB. Pages from provider products can be informative and accurate, but still incomplete. This is something to watch for not just in this thread, but generally.

    The Reverse.Mortgage page purports to be presenting information on reverse mortgages generally. But then it quietly slides into features that apply only to HECMs, such as being federally insured. You have to flip to another page to find out that this feature costs 2% of the total line of credit up front, plus 0.5% of the outstanding balance annually.

    The comparison chart says that HELOCs become due (balloon payment) after ten years. Some do. But the chart is deceptive here. The Fed writes: "Many existing HELOCs are structured such that when they reach the end of the draw period, they convert from open-ended, non-amortizing lines of credit to closed-end, amortizing loans."

    What is best depends on your intended purpose (including risk tolerance) and the terms (including special features) offered.
  • @hank I agree with you. I was going to post something along those lines but it was taking too much time to dig up the examples I wanted and I got somewhat sidetracked:-)

    The way I was planning to begin: We're talking apples, oranges, and tangerines.

    There's income, there's cash flow, and there's taxes. These are getting all conflated:

    An RMD can provide a heuristic for cash flow needs, but is not income. You're just moving an existing position from a tax-deferred account to a taxable account (a tax event). Whether you choose to sell that investment or not is independent of RMD.

    Selling a position increases cash flow, it does not generate income.

    A reverse mortgage enables one to generate cash flow using your home as security. Put simply, it's a loan for cash flow, generating negative income (it has a cost).

    Income is an increase in value. That increase can be by a "fixed" rate, or it may be variable, depending upon market conditions. It may be immediately taxable, or it may be taxable when realized.

    Consider TIPS or zeros. They are continuously growing in value, i.e. you keep getting income from them. And that income is immediately recognized (taxed). But there's no cash flow - you don't realize the income (get cash in hand) until the bonds mature or you sell them.

    But put them into a bond fund, e.g. BTTRX, and you get interest divs. The fund does this by effectively selling off some of its underlying bonds. (It reduces the size of its portfolio and does reverse splits to preserve NAV of each share.)

    The point here is that you've got the same income whether you own individual zeros or a bond fund that pays divs. To generate cash flow, one sells off bonds (arguably "principal"). If people are happy getting these "interest" divs from the bond fund, they should be just as happy selling off some zeros themselves.

    Which brings us back to hank's point. One generates income from multiple sources. The distinction between "interest", "dividends", and "capital gains" is somewhat arbitrary.

  • bee said:

    Also, a chart comparison between HELOC and Reverse Mortgages:

    This table is inaccurate in at least one respect in my long heloc experience:
    Under Traditional Bank Heloc it says "Becomes balloon after 10 year requiring full repayment". Nonsense, and naturally in the favor of RMs.

    And to further qualify my assertion

    "So it's not necessarily simply opening a line and letting it sit idle for use much later on"

    You can sort of do this, depending. If you have dealings w or holding at a bank (checking, savings, mortgage, say) and good fico, it's entirely possible to get a fixed-low-rate heloc with a high limit (depending on your property equity amount and percentage of course) with a 10y or 15y term, take an initial draw of whatever minimum (bank's heloc people will tell you), stick it in something safe whose return covers half or a third of the interest, return it in a few months (bank will apprise you) and leave things alone and sitting for future needs (bank will give details of any minimum activity and thresholds etc).

    I suspect this is not news to most here.

    Example: You have a house and land worth a half-mil with $100k left on the bank mortgage where you also have your checking and auto-deposit and perhaps billpay. With many banks, national and local alike, you could get say a $200k heloc @ say 4%, take out $10k for say a car purchase, pay it down over the next year or longer (leave all else as is; you will be paying the low interest plus some principal).
    This way you will have for the next decade or more a $190k and rising heloc for sleep-at-night at zero cost.
    If you used the draw for a new roof, or say you did, you can possibly deduct the interest from your taxes too.
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