I’m a strong believer in the reverse mortgage, so it’s always gratifying when financial professionals write positively about the program. Jerry Golden of Golden Retirement Advisors mentions reverse mortgages in a recent article on Kiplinger.com. He highlights how many financial professionals unfortunately believe that reverse mortgages are all bad and should never be used.
I hear this kind of thinking from time to time as well. Many seniors I’ve talked to over the years believe that reverse mortgages are only for broke and desperate people and should be avoided at all cost. Unfortunately, many miss out on the tremendous benefits that a reverse mortgage can offer because of this kind of misinformation.
It’s important to understand that there’s nothing inherently good or bad about a reverse mortgage. Like any other financial tool, it’s “goodness” or “badness” is determined by how it’s used.
A reverse mortgage is not the perfect solution for everybody, but it’s a fantastic financial tool for the right candidate because it can increase financial stability and security in retirement.
Reducing Sequence Risk
If you’re not familiar with the term sequence risk, you should be. It’s a potentially massive landmine that can crash and burn an otherwise solid retirement plan.
Ben Carlson, CFA, has a great detailed description of what sequence risk is and how it can (adversely) impact your financial security in retirement. It’s definitely worth a read if you want to dig into the weeds on the topic a little more.
The shorter “cliff notes” description is this: sequence risk is the risk that your retirement savings will run out faster if you’re forced to liquidate your savings when market conditions are unfavorable. In other words, if the stock market is down, you have to liquidate more shares to meet your income needs. This means you’re draining your assets faster and increasing the risk you’ll run out of money sooner than you expect.
The reverse mortgage can reduce sequence risk and extend the life of your assets by giving you another income source to live on. If market conditions are less favorable for dipping into IRAs and 401Ks, you can instead meet your income needs with home equity via the reverse mortgage.
Reducing Mortgage Payment Pressure on Retirement Savings
I worked with a 66-year old woman a few months ago who was draining $800 every month out of her IRA to make her $1,600 mortgage payment. She had no plans to sell her home and was at least 26 years from paying off the mortgage. At the rate she was draining her IRA, she would be out of money long before the mortgage would ever be paid off. She was clearly throwing good money after bad! She was essentially draining the hard-earned savings in her IRA to pay a mortgage she would likely never pay off in her lifetime.
We were able to refinance her traditional mortgage into a reverse mortgage, which doesn’t require a monthly payment. All she had to do was keep up with her property taxes, homeowner’s insurance, and HOA dues, and she was done with mortgage payments for potentially the rest of her life.
Getting rid of her huge mortgage payment enabled her to stop her IRA withdrawals and preserve her savings for far longer. Because IRA withdrawals are taxable, she was able to reduce her income taxes, too.
She also qualified for a little more than it took to pay off her mortgage, so she was able to to allocate the remaining proceeds to a line of credit that could be tapped for financial emergencies. If she got hit with unexpected medical bills, car repairs, or home repairs, she could dip into the reverse mortgage line of credit and leave her IRA untouched.
In short, the reverse mortgage was a huge win for her!
Increasing Liquid Retirement Assets
When you’re retired, it’s to your benefit to have as many financial options as possible. You’re not at a stage in life where you can easily earn and replace savings drained due to unforeseen medical expenses, home repairs, or other emergency expenses.
If you owe little to nothing on your home, you may be able to add substantially to your liquid retirement assets with a reverse mortgage line of credit. This is one of my favorite ways to structure the reverse mortgage because it essentially turns a large chunk of your home’s value into a tax-free retirement account that will automatically grow and compound larger.
Home equity is often the largest asset many seniors have. Unfortunately, it often goes unused because the only way to normally get into home equity is either by selling the home or taking on a mortgage payment. A reverse mortgage is designed to solve this issue. It enables seniors to access a large portion of their home’s value without giving up ownership or taking on a mortgage payment.
Adding another liquid retirement asset to the picture means your other assets will last longer and you’ll be better positioned to weather the inevitable unexpected expense when it arises.
If you’d like to find out more details about the line of credit strategy, you can read about it here.
Adding Financial Stability and Security to Retirement
As the HECM program is continually improved in the years ahead, I expect that increasing numbers of financial advisors will recommend them to their clients. In an era when the cost of living is rising and retirees are living longer, it’s essential that retirees have as many options as possible to protect and preserve their assets for as long as possible. It’s great to see that home equity is increasingly becoming part of the retirement planning picture.