Retirement planning has become increasingly complex as Americans face , rising healthcare costs and concerns about Social Security's long-term sustainability. While Social Security remains a cornerstone of retirement income for most Americans, the average monthly benefit, , often falls short of covering all living expenses. As a result, many retirees find themselves in a financial squeeze, including those who are "house rich but cash poor" – meaning those who are sitting on a significant amount of home equity but struggling with monthly cash flow.

For decades, the conventional wisdom regarding homeownership was simple: Pay off your mortgage before retirement and live debt-free in your golden years. However, this approach can leave retirees with substantial wealth tied up in their homes while facing monthly budget constraints, especially in today's inflationary environment, where the prices of essentials are growing. And, the irony of that is stark. You might own a $400,000 home outright but still worry about affording groceries or prescription medications on a fixed income.

This is where reverse mortgages enter the conversation as a potential game-changer. With a reverse mortgage, retirees have the option to convert their home's equity into usable income while continuing to live in the home. For homeowners aged 62 and older, this can bridge the gap between Social Security benefits and the lifestyle they want to maintain in retirement. But how does that actually work?

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3 ways a reverse mortgage can supplement your Social Security

If your finances are stretched thin during retirement, here's how opting for a reverse mortgage can help supplement the money from your Social Security benefits:

By turning your home equity into a monthly income stream

One option retirees have when taking out a reverse mortgage is to receive regular monthly payments rather than a lump sum loan or a line of credit they can draw from. By opting for monthly payments, retirees are essentially able to turn part of their home equity into a steady cash flow, much like creating a second paycheck with their home's equity. For retirees who are relying solely on Social Security, this can provide much-needed breathing room in the budget. 

For example, you might use the extra income to cover everyday expenses like food, gas and utility bills or even to enjoy small luxuries like travel or hobbies that make retirement more fulfilling. And, unlike a traditional mortgage or home equity loan, you won't be required to make monthly repayments on the money you receive from your reverse mortgage loan. As long as you stay in your home, keep up with property taxes and insurance, and maintain the property, repayment isn't due until you move out, sell the home or die.

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By allowing you to access cash for health care and unexpected costs

Major medical issues tend to become as we age, and as a result, medical expenses are one of the biggest financial challenges retirees face. While Medicare and Medicare supplemental insurance can help offset those expenses, it doesn't cover everything, and when you're reliant primarily on your Social Security benefits, all it takes is an unexpected hospital visit or prescription drug bill to throw off your budget.

A reverse mortgage can help by giving you access to a lump sum of cash or a line of credit you can tap when needed for these types of costs. This can be especially valuable for covering out-of-pocket long-term care costs, in-home care or home modifications, like installing a stairlift or walk-in shower, that make it easier to age in place. 

Having these funds available could also help you avoid draining your retirement savings or turning to high-rate credit cards when surprise medical expenses pop up.

By allowing you to delay Social Security and claim bigger benefits

If you haven't yet started collecting Social Security, using a reverse mortgage could allow you to delay claiming your benefits. For every year you postpone Social Security past your full retirement age (up to age 70), your benefits increase . So, if you're 62 or older and considering early retirement, you could use reverse mortgage payments to cover living expenses while letting your Social Security benefits grow. 

This strategy can result in significantly higher lifetime Social Security payments, potentially allowing you to collect 30% to 40% more than if you claimed your benefits at 62. This strategy isn't for everyone, of course, but it could make sense if you want to lock in a higher Social Security payment for the rest of your life — and you're in good health and expect to live well into your 80s or beyond.

The bottom line

A reverse mortgage can be a powerful way to supplement Social Security income and give your retirement budget a little more flexibility. Whether you're looking to cover essential expenses, pay for medical care or want to strategically delay claiming Social Security, tapping into your home equity might help you live more comfortably in retirement.

But like any financial decision, it's crucial to understand how a reverse mortgage works and make sure this strategy aligns with your goals before making any decision. Done thoughtfully, though, a reverse mortgage could help you make the most of both your home and your hard-earned benefits.