I own a $5 million house in Miami – should I do a reverse mortgage for more income?

A Reddit post recently caught my attention from a 63-year-old retired anesthesiologist facing a financial dilemma.

With a net worth of approximately $11 million, including a $5.2 million Miami home and a $4.2 million taxable investment account, he’s grappling with how to sustain a lavish lifestyle costing $35,000 per month.

Despite substantial assets, his current income streams—$30,000 annually from dividends and $2,500 monthly from Social Security—fall short of covering his expenses.

He’s contemplating a reverse mortgage on his Miami home to bridge the gap but is uncertain if this is the right move.

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Understanding the Financial Landscape

First, let’s break down his assets that he shared in the post:

• Primary Residence: $5.2 million Miami house.
• Investment Portfolio: $4.2 million in taxable accounts.
• Retirement Account: $1.1 million in a 401(k) invested in S&P 500 funds.
• Secondary Property: $500,000 condo in Bonita Springs, currently unused.
• Other Assets: A $100,000 boat.
• Liabilities: None.

His immediate concern is generating enough cash flow to maintain his $35,000 monthly spending without liquidating his assets or significantly altering his lifestyle.

Evaluating the Reverse Mortgage Option

A reverse mortgage allows homeowners aged 62 or older to convert part of their home equity into cash without selling the home or incurring monthly payments. While this seems appealing, especially since he wishes to remain in his customized home, there are several factors to consider:

• Costs and Fees: Reverse mortgages come with higher interest rates and closing costs compared to traditional mortgages.
• Accumulating Interest: The loan balance increases over time as interest accrues, reducing the equity left in the home.
• Impact on Inheritance: Although he’s not focused on leaving an inheritance, a reverse mortgage could significantly diminish any remaining equity for his daughter.

Given his substantial net worth and other assets, a reverse mortgage might not be the most financially prudent option.

Alternative Strategies

1. Diversify and Rebalance the Investment Portfolio:
   • Dividend-Paying Stocks and Bonds: Reallocating a portion of his taxable account into higher-yielding dividend stocks or municipal bonds could boost his income without selling assets.
   • Systematic Withdrawal Plan (SWP): Implementing an SWP allows for regular withdrawals from his investment portfolio, designed to provide steady income while aiming to preserve capital over the long term.
2. Utilize the Unused Condo:
   • Sell the Bonita Springs Condo: Liquidating this $500,000 asset provides immediate cash that could be invested in income-generating assets.
   • Rent Out the Condo: Generating rental income could contribute significantly to his monthly cash flow needs.
3. Access Retirement Accounts Strategically:
   • 401(k) Withdrawals: Because he’s already in his 60s, he can begin taking penalty-free distributions from his 401(k). Coordinating withdrawals with tax-efficient strategies can minimize the tax impact.
   • Roth Conversion: Converting a portion of his 401(k) into a Roth IRA could provide tax-free income in the future, especially valuable if he expects tax rates to rise.
4. Consider Downsizing Luxury Expenses:
   • While he prefers not to alter his lifestyle, even modest adjustments in monthly spending can significantly impact the sustainability of his retirement funds over time.
5. Consult a Financial Planner:
   • A personalized financial plan can address his unique situation, balancing his desire to maintain his lifestyle with the need for sustainable income.

My $0.02

This is just my opinion and not financial advice, but here’s my take. While a reverse mortgage offers a way to unlock home equity without selling, it may not be the optimal solution for someone with diversified assets and significant net worth. By re-evaluating his investment strategy, utilizing underused assets like the Bonita Springs condo, and strategically accessing retirement accounts, he can enhance his income streams without incurring the costs and risks associated with a reverse mortgage.

It’s essential to approach this decision comprehensively, considering both immediate needs and long-term financial health. Consulting with a financial advisor can provide tailored strategies to ensure he enjoys his retirement years comfortably and confidently.