Money power: Know pros and cons of reverse mortgages and immediate annuities
BY SANDRA BLOCK Money Power
Sunday, November 25, 2012
11/25/12 at 7:16 AM
Here is what you need to know about immediate annuities and reverse mortgages before you buy.
Immediate annuities
The pitch: Make your savings last as long as you do.
How they work: In exchange for a lump sum, an insurance company agrees to give you a monthly check for the rest of your life or for a specified period.
The cost: The amount is built into the payout, which makes it fairly easy to compare policies. For example, a 65-year-old man with $200,000 to invest would qualify for monthly payments ranging from $983 to $1,091, according to tulsaworld.com/immediateannuities
Pros: If you're concerned that you may run out of money in retirement, buying an immediate annuity guarantees fixed payments. Buying an annuity also relieves you of the responsibility - and risk - of investing the money and calculating annual withdrawals.
Cons: With most policies, you can't get your money back. Low interest rates reduce the size of your payout, and inflation will shrink its purchasing power. You can buy an immediate annuity that's adjusted for inflation, but your initial payout will be lower.
Reverse mortgages
The pitch: Enjoy life without mortgage payments.
How they work: A reverse mortgage is a loan against your home that doesn't have to be repaid until you sell, move out for at least 12 months, or die. The size of the loan is based on your home's appraised value, your age and current interest rates.
The cost: The standard version imposes a 2-percent mortgage insurance premium on the home's value, even if you borrow much less. You'll also pay loan origination fees, closing costs, interest and servicing fees. These costs can be rolled into the loan, but doing so will reduce the amount you receive.
Pros: A reverse mortgage doesn't have to be repaid as long as you remain in your home. Some seniors use the money to supplement living expenses; others use it to make their homes more accessible for disabled residents.
Cons: In addition to high initial costs, you're tapping home equity that you may need later in life for emergencies. And if you don't keep up with insurance, maintenance and property tax payments, you could face foreclosure.
Original Print Headline: Know pros and cons of new investments
Sandra Block is a senior associate editor at Kiplinger's Personal Finance magazine. To send her a question or comment, go to tulsaworld.com/kiplingerfeedback.
