Retirees looking for extra, steady cash to supplement their fixed income from Social Security and retirement savings have likely come across two key tools: a reverse mortgage and an annuity.
Both options can provide additional income for life, but they differ in nearly every other way. What's more, each also has its own benefits and downsides.
CNBC Select reviews each tool, what each is for, its pros and cons and our top picks for the best lenders and annuity providers.
Offers in this section are from affiliate partners and selected based on a combination of engagement, product relevance, compensation, and consistent availability.
Flex Payment HECM, Flex Payment jumbo reverse, reverse for purchase, refinancing
Up to $4 million for Flex Payment jumbo mortgages
HECM, HECM for purchase, Longbridge Platinum
$4 million for Longbridge Platinum
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Offers in this section are from affiliate partners and selected based on a combination of engagement, product relevance, compensation, and consistent availability.
Immediate annuities, fixed annuities, fixed indexed annuities, registered index-linked annuities
$10,000 for Athene Agility, Athene Protector, Athene MaxRate, Athene Ascent Pro and Athene Performance Elite
Gainbridge Save℠ annuities grow at a fixed interest rate, making them a great option for investors who don't want to assume too much risk.
Gainbridge annuities don't have upfront sales charges or administrative fees. However, withdrawal fees and surrender charges may apply if you withdraw above 10% of your account's value per year.
What is a reverse mortgage?
With a reverse mortgage, homeowners ages 62 and older can borrow against the equity they've built in their home — without a monthly payment.
Instead, the bill — plus interest — comes due when the homeowner stops living in the house full-time, whether that be due to relocation, moving into a care facility or death. The bill may also come due if the homeowner fails to make timely insurance and property tax payments or stops maintaining the property.
If the homeowner or their heirs can't afford to pay it back, the lender can force foreclosure.
Who are reverse mortgages for?
Reverse mortgages can be an option for homeowners who have a lot of equity in their home, need extra cash and want a set amount.
If you decide that a reverse mortgage is right for you, Select recommends Longbridge and Mutual of Omaha. Both offer home equity conversion mortgages — a government-insured reverse mortgage — and jumbo reverse mortgages for loans of up to $4 million.
Longbridge is an excellent option, especially for those looking to save money. Longbridge has lower-than-average rates and doesn't charge a service fee, which could cost up to $35 per month.
Longbridge Financial Reverse Mortgage
Annual Percentage Rate (APR)
Apply for personalized rates
Types of reverse mortgages
HECM reverse, HECM for purchase, Platinum Mortgage (proprietary loan with larger limits and a low age requirement of over 55)
Minimum equity
No specific minimum equity listed, but generally 50%
Pros
- Proprietary loan allows those as young as 55 to access a reverse mortgage, lower than the 62 that HECM reverse mortgages require.
- Accredited by the BBB with an A+ rating
- Available in all 50 states
- Provides a "scenario calculator," on website that can help estimate the cost of a reverse mortgage
Cons
- Can't complete application online
If you prefer to do your lending in-person, Mutual of Omaha has dozens of locations nationwide, which many reverse mortgage lenders do not.
Mutual of Omaha Reverse Mortgage
Loan types
HECM, HECM for purchase jumbo, SecureEquity+, refinancing
Minimum equity
50%
Maximum loan
Up to $4 million
Age requirement
62 for HECM, 55 for SecureEquity+
Availability
Mutual of Omaha offers reverse mortgages nationwide except for New York and West Virginia.
Pros
- Available in all states except New York and West Virginia
- High customer satisfaction ratings
- Provides an assortment of tools on its website
Cons
- Not transparent about rates and fees
Pros and cons of reverse mortgages
- Access to the full loan amount, penalty-free, if you need it: Unlike annuities, which may charge a penalty fee for accessing a portion of the funds early, you have access to the full reverse mortgage immediately.
- No monthly payments: You don't have to make any payments until you no longer live in the home.
- No maximum age cut-off: Unlike many annuity options, a reverse mortgage has no maximum age limit; you can get one as late in life as you like.
- Balloon payment: Your full loan amount, plus interest, will come due upon certain events or circumstances. If you can't make that payment, the lender can force foreclosure.
- High fees: A reverse mortgage is not free to open. You'll have to pay origination fees, third-party fees and an insurance fee, per the CFPB.
- Your heirs will have to settle the bill: Once you die, your reverse mortgage, plus any interest, will come due. If your heirs can't make the payment or sell the home, the bank can foreclose.
What is an annuity?
An annuity is a contract between you and an insurance company that turns cash into a guaranteed stream of income. With this kind of agreement, you'll pay either a lump sum or make several smaller payments to fund it. The money grows, often tax-deferred, before you start receiving payments for the rest of your life.
There are many types of annuities, and one way they are categorized is by how quickly they pay out: immediate annuities start shortly after signing, while deferred annuities pay out after a certain number of years stated in the contract.
You also have options for how they grow: a fixed annuity offers a guaranteed rate of return and steady payouts, while an indexed annuity is tied to the performance of a market index like the S&P 500, with caps and floors. Additionally, a variable annuity offers a range of investment options you can choose from to keep your contract growing.
Who are annuities for?
Annuities can be a good fit if you're a relatively risk-averse investor — that is, you'd rather not take chances with your money. Fixed annuities can be particularly attractive for these types of people, as they guarantee a fixed rate of return on your funds.
One of our top picks for fixed annuities is Gainbridge. It offers two options — Gainbridge Save Traditional℠ Account and Gainbridge Save Retirement℠ Account — that both grow at a fixed rate that's higher than most certificate of deposit (CD) returns, while still allowing you to withdraw up to 10% of your account value each year.
Gainbridge Annuities
Annuity types
Gainbridge Save℠ Annuity are fixed annuities
Fees
Gainbridge annuities don't have upfront sales charges or administrative fees. However, withdrawal fees and surrender charges may apply if you withdraw above 10% of your account's value per year.
Minimum deposit
The minimum deposit is $1,000 for all annuities across the platform
Pros
- No sales or administrative fees
- Fixed interest growth ideal for risk-adverse investors
- Straightforward options and an easy-to-use website
Cons
- Relatively few investment options
- Subject to 10% early withdrawal penalty depending on product selection and age
They can also be a good fit for those worried the gap between their expenses and funds like Social Security will be large, or who fear outliving their savings. While some annuities can have high fees and limit growth compared to investing on your own, annuities guarantee a steady income stream for retirement — something investing on your own may not provide.
Athene's MYG fixed annuities stand out because of its accessible $5,000 minimum initial premium requirement — lower than some other brands in the space — and the fact that it doesn't charge annual contract fees.
Athene Annuities
Annuity types
Immediate annuities, fixed annuities, fixed indexed annuities, registered index-linked annuities
Minimum deposit
$10,000 for Athene Agility, Athene Protector, Athene MaxRate, Athene Ascent Pro and Athene Performance Elite
Fees
Athene annuities do not have annual contract fees but rider fees can be between 0.40% and 1%.
Pros
- Wide variety of annuity types and accumulation options
- Highly rated for financial strength
- One of the largest providers of annuities in the U.S.
Cons
- Poor customer review ratings with Better Business Bureau
- Not all products available in all states
Pros and cons of annuities
Annuities can guarantee income for life, but they're not the right fit for every soon-to-be retiree. Consider these pros and cons before you buy:
- Can guarantee your retirement income: No matter what happens in the economy or in your life, you'll receive income monthly, quarterly or annually.
- Potential tax deferment: Your investments grow tax-deferred, so you won't pay taxes on the earnings until you withdraw the funds. That means you can let your investments grow until retirement, when you may be in a lower tax bracket.
- Could tie up your savings: Annuities penalize you if you withdraw funds early or cancel them. This could mean that you need to keep some funds aside for unexpected expenses like home or car repairs or other financial obligations.
- High fees: Some annuities charge high commission fees, administrative fees and maintenance fees. You'd also have to pay for riders, like living benefits added to your contract. These things can eat into the total overall growth of your money in an annuity.
- Inflation worries: While you might have chosen an amount that would have been ideal when you bought the contract, inflation and rising prices may mean your payment doesn't go as far as you expected. Adding a cost-of-living rider can increase your payment each year, but will come at an additional cost.
Why trust CNBC Select?
At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every insurance and mortgage article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of insurance and mortgage products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics. See our methodology for more information on how we choose the best annuities.
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