Even seniors with $2 million in savings whose homes are free and clear should at least consider a reverse mortgage, even though few may think so.   (And if you’ve saved less, like most people have, then it’s a no-brianer.)  I’m right about this, and I’m going to show you why in the hopes that I can change a few minds before it’s too late, because this is one lesson that you don’t want to learn the hard way.

Even these days, having a million dollars in the bank sounds like a significant amount of financial security, doesn’t it?  Or how about $2 million?  That’s got to be enough to keep you safe from any foreseeable financial storm, right?  Why would someone with that kind of money in the bank, and no mortgage, need a reverse mortgage?

Well, there are lots of reasons, actually.  But, before I list quite a few of them, it’s important to understand what $1 million really means to those who have retired, and don’t want to outlive their money.  You see, once you retire, it’s not your labor that generates your income… it’s your nest egg that has to produce the income you need to maintain your lifestyle. (Not to mention, to cover the unexpected.)

So, how much can you withdraw from your nest egg each year to provide that income?  For years, financial planning experts have put the number at FOUR PERCENT, and recently some experts have pointed out that even four percent may be too high in today’s low yield environment.

The reason is simple… some years the market goes up, but other years it goes down.  And no matter which way it goes, once you’ve retired, you still need your income to live your life.  Here’s an example of what can happen…

Let’s say you had retired at the beginning of 2000 when you were 65, and you invested $1,000,000 in the S&P 500 Index on January 1, 2000, and taken withdrawals of 5% a year, or $50,000, to cover your retirement living expenses.

As of July 30, 2008, you’d have $482,930… half of what you started with, and you’d be 73.  Your life expectancy would be roughly 15 years, and you’d run out of money well before that.

So, at four percent withdrawals each year, $1 million in savings is actually income of only $40,000 a year… $2 million would only represent $80,000 in annual income.  When you think about the money in terms of the annual income you can expect, it’s not nearly as much as when you describe it as being millions.  Keep the HECM line-of-credit on the shelf, always growing, until needed.  We have not even touched upon long term health care needs in the future.

Retirement today is measured in decades, not years.

---------------------Martin Mandelman