Unprecedented inflation and market volatility are a growing threat to destabilize retirement plans. Retirement experts now confirm that reverse mortgages can be a solution, and should be a fundamental consideration in retirement planning.
By George Downey
Asset allocation and diversification are long accepted strategies to mitigate investment risk, which is especially important for those in, or approaching retirement. However, a study published in the Journal of Financial Planning (December, 2021), co-authored by Philip Walker; Barry H. Sacks, Ph.D., J.D.; and Stephen R. Sacks, Ph.D., provides insight on solving this ominous dilemma.
Coordinated Strategy Reduces Risk, Increases Financial Security
The solution is made possible by the inclusion of reverse mortgages in the financial planning process. The authors are highly respected retirement experts. Moreover, the research and data they compiled are extensive and provide documented proof that a coordinated withdrawal strategy between retirement savings accounts and distributions of home equity from reverse mortgages can significantly increase financial stability and decrease risks from market volatility. You may read the study at the Financial Planning Association website. Additionally, in a recent article entitled “Reverse Mortgages Could Be Highly Beneficial to Mass Affluent Seniors, Study Finds,” Chris Clow, the veteran correspondent from Reverse Mortgage Daily, quoted a Finance of America Reverse statement:
“[T]hose who use a reverse mortgage as a buffer asset in down-years stand to reduce their exposure to market volatility by nearly 10 times and could significantly increase their net worth over a 30-year retirement.” (Clow, 2021)
Senior Homeowners at Greatest Risk
Home equity (housing wealth) is the largest single asset of most senior homeowners. Any reduction of value can have a profound and long-lasting effect on retirement finances. Property value declines can and do happen quickly. Value recovery, however, takes considerably more time, which older homeowners may not have. Fortunately, senior homeowners may have the ability to hedge this risk by locking in today’s values and gain access to more funding now or later when it may be needed.
A Solution to Protect Current Home Value
One of the unique features of reverse mortgages is that the loan amount and terms are established up front and guaranteed for the life of the loan. Traditional home equity loans and lines of credit may be unavailable, frozen, or cancelled in adverse economic times. Reverse mortgage borrowers, on the other hand, are protected from these risks regardless of any future economic or real estate market decline.
A key factor determining reverse mortgage funding amount is the home’s current market value. Fortunately, reverse mortgage borrowers can lock in current record home values, create access to greater funding amounts, and gain protection from the uncertainty of future economic or property price declines.
Unique and Versatile Financial Planning Tool
Financial advisors are recognizing that reverse mortgages make possible borrowing with exclusive features including: (1) no obligation to make payments; (2) no maturity date as long as one borrower lives in the home, (3) receive income tax-free distributions, (4) use funds for any purpose, (5) establish a guaranteed growing line of credit that can’t be cancelled, (6) no personal liability, (7) no obligation to repay more than the property value at time of repayment, and more.
Understanding the unique combination of features and versatility provides financial advisors and clients the ability to monetize home equity. In so doing, they can unlock housing wealth to increase financial resources that will improve and extend retirement security – without selling the home.
Reverse Mortgage Common Uses
Payoff mortgage and other debt
Establish scheduled distributions to supplement cash needs
Create a guaranteed growing line of credit for future needs
Pay health and long-term care costs
Reduce retirement risks
Sequence of return risk
Health care and longevity risk
Fear of running out of money
Fund contributions to family, church, and charities
Purchase second home, RV, travel
Enhanced Planning Potential
Integrating housing wealth into the financial planning process can be a game changer. The elimination of mandatory debt payments plus access to additional income tax-free funding provides homeowners and planners with more planning versatility and greater capacity.
Borrower Obligations – It’s A Mortgage – Just Different
Funding and loan terms cannot be frozen or cancelled as long as the loan remains in good standing. Borrower obligations are limited to:
Keeping real estate taxes, liability insurance, and property charges current.
Providing basic home maintenance
Continue living in the property as the primary residence.
Good For Some – Not For All
Every situation is different. A reverse mortgage may, or may not, be a good fit based on individual qualifications, circumstances and needs. To learn more, consultation with a Certified Reverse Mortgage Professional (CRMP) is recommended. CRMPs are certified, experienced, and exam tested professionals pledged to strict observance of the Code of Ethics & Professional Responsibility of the National Reverse Mortgage Lenders Association (NRMLA), Washington DC. More information on reverse mortgages and a list of CRMPs is available on NRMLA’s consumer website www.reverse-mortgage.org