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How to Fill Income Gap Forcing You to Take Social Security Early

NEW YORK (TheStreet) -- "Now that I'm 62, should I start my Social Security?"

Maybe not -- if you can buy time with a temporary reverse mortgage

When to start Social Security is a common question among those nearing the magic age of 62, when that hard-earned benefit can begin to flow. Most experts recommend waiting if at all possible. If you're entitled to a $1,000 monthly benefit at your "full" retirement age of 66, you'll get just $750 at 62. Wait until 70 and you'll get $1,320.

Postponing benefits, in other words, is like a guaranteed 8% annual investment return. You'd never get that much in bank savings or bond yield.

But what if money is too tight for you to wait? There are various ways to close the gap between expenses and income from, say, a pension and investments. You can postpone retirement, work part time after retiring or scrounge for ways to trim expenses.

In fact, the gap may not be as big as you fear. After retiring, you may not need as big an income as before if your home is paid for, the kids have left and you no longer need to add cash to your investments. Many people find that the tranquillity of retirement is pleasant enough; they don't really need the extravagant lifestyle they'd wished for earlier. And a little belt tightening might be relatively painless, especially if you know it's just until you do start Social Security in a few years.

Also see: Mortgage and Housing Outlook at Midyear Is a Muddle

Also, rather than give up that 8% annual gain from postponing Social Security, it might pay to tap cash and bond holdings that won't grow as fast. One could even downsize temporarily, moving to a cheaper place for a few years and renting out the main home.

If all these measures fail to close the income-expenses gap, tapping home equity through a reverse mortgage is another option. A reverse mortgage is a loan against the equity in the home, which is the difference between the home's value and what you owe on any mortgage. You need no income to qualify and do not make loan payments. Instead, the postponed interest payments build up and, along with the original loan, are paid off after you sell the home or die.

Reverse mortgages are typically thought of as a final income source to tap late in life, because the older you are the more you can borrow on a home of a given value, and because waiting leaves less time for the growing interest obligations to chew away at your equity.

But it need not be so. It's possible, for example, to take your reverse mortgage as a monthly income and stop those payments when you no longer want them. That makes these loans an option for those who want a temporary income before they start tapping Social Security, says Jack M. Guttentag, professor of finance emeritus at the Wharton School of the University of Pennsylvania. 

Also see: Why You Shouldn't Give Up on Buying a Home

In his example, a 62-year-old with $312,000 in home equity could use a reverse mortgage to draw $1,000 a month for eight years, making it possible to postpone the start of Social Security to age 70. At this summer's interest rates, this homeowner would use only half of the money that could ultimately be received through a reverse mortgage, leaving the other half for later. In fact, that remaining borrowing power could grow if the home were to appreciate.

The reverse mortgage is not free money. In addition to the interest charges there are various set-up and insurance costs that need to be factored in. The borrower can lose the home if he or she falls behind in property tax payments or homeowner's insurance.

Still, a temporary reverse mortgage is worth considering is other measures aren't enough. On his website, Guttentag provides a recently modified calculator for assessing this strategy.

"The calculator will indicate your [reverse mortgage] borrowing power, which depends on your age, the value of your house less any existing mortgage debt and the [loan] interest rate and settlement costs," he says. "It will also calculate the borrowing power required to generate the income you need for the period until Social Security kicks in."

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