Retirement Planning With A Reverse Mortgage

Up until the last few years, financial planners as well as consumers have consistently viewed the reverse mortgage as a last resort, and that it was something you should get only if you have exhausted all your other resources. However, during the last few years several PhD’s have done some significant research into how the reverse mortgage might fit into retirement planning. Their research turned the conventional wisdom of using the reverse mortgage as a last resort on its head.

It was not until the last few years that financial planners have really begun to look at how the reverse mortgage could be used as part of retirement planning. This has come about due to several financial researchers reporting their findings

Use of Home Equity in Retirement Planning

Per a Bankrate survey, 23% of Americans site running out of money as their number one fear during retirement.[1]

A recent survey from the American College of Financial Services polled 1,000 people between the ages of 55 and 75 with at least $100,000 in investable assets and $100,000 in home equity, and the survey found: [2]

– 44% of the survey’s respondents stated that they considered using home equity in retirement, but only 25% said they would be comfortable spending it as a source of income.

– 14% of the respondents had considered a reverse mortgage, while only a single respondent admitted to carrying reverse mortgage. Among those that turned down the product, 44% said they had sufficient income and had no use for it, while 18% felt they were “too young.” Of the respondents polled, 10% said they were “not ready” to consider it, and 9% dubbed it as being “too risky.”

7 Ways To Use A Reverse Mortgage in Your Retirement Plan

Standby Line of Credit

One of the most amazing features about a reverse mortgage line of credit is that the unused portion of the line of credit grows in value. It grows at the current interest rate, plus .5%.

There are several reasons to consider a reverse mortgage and more specifically the standby line of credit.
1. It creates liquidity in the home from what is otherwise an illiquid asset.

2. It creates the potential to leave a larger legacy at death.

3. It creates a hedge against falling home prices. Median housing prices in the United States peaked in July 2007 and bottomed out in February 2012. Some area of the country saw a 35% drop in home values. Median prices in many areas did not hit the 2007 highs until  2017.[1] It took almost 9 years for the real estate market to recover and some areas have still not reached those 2007 highs.

The beauty of the line of credit is that housing prices have no effect on its growth. Even if home prices fall, the unused portion of the line of credit will continue to grow in value. As contrary as it sounds, you want higher interest rates, not lower rates, so that your line of credit grows bigger, faster. If you got to a point where the line of credit value exceeded the home’s value, you could draw all the funds from the line of credit if you wanted to do so.

Contingency Fund

Even the best plans fail. Neither you nor I can predict the future. Even though you have no need for a reverse mortgage now, it could be a smart move to get a standby reverse mortgage line of credit now. The stock market could crash, housing prices could plummet, health care costs could spiral out of control, there may be a need for in-home care, or you may end up in a divorce. Having access to a reverse mortgage line of credit could put you in a much better financial position to deal with any of those issues. You could think of it like insurance. Hopefully you never need to use it, but you are happy you have it if the need arises.

Unlike a standard home equity line of credit from the bank, you are guaranteed access to the line of credit as long as you are living in your home, your taxes and insurance are paid and there is no deferred maintenance. With a traditional credit line, the bank is not required to provide funds or even access to those funds. Many people experienced this in the economic down turn; banks either reduced availability or even closed home equity lines of credit.

This strategy could also be used to replace your cash reserves. Many financial advisors recommend having 1 to 3 years of cash available during your retirement. The problem with cash is that it loses value every day due to inflation. Instead of cash in the bank, in a safe or buried out in the backyard, you could be better off putting that cash to work in some sort of conservative investment. Having the line of credit can accomplish the same thing as the liquid cash, and you still have peace of mind that funds are available when you need them.

Delay Claiming Social Security

Do a little research and you will find all kinds of articles that talk about the massive financial benefits of waiting to claim Social Security. There can be as much as a 76% increase in Social Security benefits by claiming at 70 versus 62.[2] While that is a huge increase in monthly income, 44% of people claim at 62 and only 11% wait past 66 (full retirement age) to claim their benefits.[3] A reverse mortgage line of credit could provide the monthly income needed to delay the claiming of your benefits.

Reduce Portfolio Withdrawals

This is a simple concept. Reduce the amount of withdrawals from your portfolio through the utilization of a reverse mortgage. Reducing what you need to withdraw from your retirement portfolio can help your retirement assets last longer and allow them to continue to grow.

Getting rid of mortgage payments and other debt payments using a reverse mortgage means there will be less you will need to withdraw from retirement. Implementing either the term or tenure payments can also reduce what you need to withdraw from your portfolio.

I highly recommend sitting down with your financial advisor as well as CPA to see how a reduction in portfolio draws will impact your retirement accounts as well as your taxes. I bet everyone involved will be pleasantly surprised.

Portfolio Upside Potential

Barry H. Sacks, J.D., Ph.D., and Stephen R. Sacks, Ph.D. did a case study utilizing three different strategies.[4]

The first was the common conventional wisdom, using the reverse mortgage as a last resort.

The second was opening a line of credit using a reverse mortgage, and spending the home’s equity first before touching the investment portfolio. Their theory was, that by spending the home’s equity first, it gave the investment portfolio additional time to grow.

The third was a coordinated strategy where there would be no draws made from a portfolio the year after a negative return on the investment portfolio. Instead, the funds needed would be pulled from the reverse mortgage line of credit. Their theory was that by pulling funds from the reverse mortgage for the next year when the previous year had a negative return on the portfolio, that it would allow the portfolio to recover from the losses.

Utilizing the reverse mortgage as a last resort had the worst outcomes. There was as much as a 40% lower chance of success rates in the retirement plan with this method when compared to the other two. The other two options were almost identical. In most cases, there were only a few percentage points difference in the success rates of the financial plan.

By spending the home’s equity first or using the coordinated strategy, there were some outcomes that were very interesting. First, withdrawals from the portfolio could be increased; which in turn increases monthly cash flow without significantly reducing the success rate.  Second, after 30 years, the retiree’s net worth was twice as likely to be higher than using the reverse mortgage as a last resort. Finally, success rates of the retirement plan were increased significantly.

It is important to understand that this research was done with computer models that generated tens of thousands of possible outcomes. Following the methodology obviously comes with risks, mainly because we have no idea how future markets will perform. If this of interest to you, I highly recommend speaking with your financial planner.

Home Equity Last

Research has shown that getting a reverse mortgage line of credit early on in retirement and never using it until other resources have been depleted has the highest success rates in a retirement plan. It outperformed all other strategies for the use of the reverse mortgage in retirement, and it is by far the simplest method to follow.  The premise is simple. Get the reverse mortgage standby line of credit, let it grow and spend your retirement assets as planned. Once retirement assets are exhausted, you start spending the home equity.

The kicker is not to be tempted into using the funds. Using the funds could severely derail the success of your retirement plan. Think of the line of credit like a fire alarm. Break the glass only in an emergency.

Budget Keeper

One of the biggest problems with being retired and living on a fixed income is that you are on a fixed income. You must live within your means and deviating outside of that creates severe financial risks. The budget can easily be blown with car repairs, unexpected medical expenses and house maintenance such as HVAC or roof repairs, which can be very expensive. Using a credit card for any unexpected expense is a slippery slope. Credit card debt can continue to affect the budget for many years. My grandparents had a reverse mortgage, and they used it to keep from utilizing credit cards when unbudgeted and unexpected expenses arose.

I need to reiterate that I am not a financial planner. I cannot tell you how a reverse mortgage will affect your overall retirement plan. However, myself or any other reverse mortgage specialist can provide you with what your numbers would look like with a reverse mortgage.  With those numbers, you can sit down with your advisor so that they run scenarios to see how a reverse mortgage will impact your financial plan.