While financial planners are still largely hesitant to recognize a reverse mortgage as a viable option for cash-strapped seniors, some are coming around to recommending them as their clients are less and less prepared for retirement.
The American population is, generally speaking, living longer than ever before, and many haven’t properly planned for this, says Karen DeRose, of Chicago-based DeRose Financial Planning Group.
“What we’re seeing is, they have a lot of equity locked up into their homes,” she says. “People didn’t realize that they’re going to live this long, and because of that, they’re running out of money, or need to supplement their pensions or Social Security.”
The rocky economic landscape has affected many older Americans, and AARP estimates that a quarter of seniors exhausted their savings during the recession, with another 67% forced to draw upon their retirement savings. This results in more than half of seniors, at 53%, not feeling confident for retirement.
Older people do not want to move out of their homes, DeRose says, but many times they feel they have to, if they can no longer afford their cost of living. However, being forced to leave home can have very negative emotional implications on seniors, and that’s where a reverse mortgage would come in.
“I can see using it where you really want to keep the person in their home, or if it’s going to cause problems for the children to try to figure out how to help supplement Mom and Dad’s income,” says DeRose. “I think that can be a good thing. Moving an elderly parent out can be very, very difficult.”
For some financial planners, an asset is an asset, and home equity just that: an asset, to be used accordingly when planning for the future.
Aric Walker, a senior advisor from Enumclaw, Wash.-based Senior Planning Solutions, says he approaches client meetings with this mindset and the question, “What is your house doing for you?” If it’s costing them monthly payments that cause a strain on their budgets, it’s no longer functioning as an asset, and something needs to change, he says. That’s where a reverse mortgage comes in, and he says he’s had several experiences with significantly improving a client’s monthly cash flow and easing their financial worries.
Multiple clients of Walker’s have ended up getting a reverse mortgage, giving him insight into which financial situations call for the product. He recommends that borrowers choose the lump sum option, and says he sometimes advises his clients to use the funds to invest in fixed-rate or indexed annuities, some of which offer 100% principal guarantees; these, he says, allow his clients a better outcome than what banks can offer.
Research on retirement asset decumulation strategies by the Boston College Center for Retirement Research supports Walker’s method.
“The strategy of combining a reverse mortgage with an immediate annuity yields a substantially higher income [compared to some studied alternatives],” says Wei Sun, the Center’s lead researcher. “So the dominant strategy is probably to spend down one’s financial wealth, take a reverse mortgage, and use the proceeds to buy an annuity.”
Several financial planners RMD spoke with admitted they did not know enough about the product to recommend it to their clients; the less they knew about it, the less likely they were to even consider it as an option. One said he was unfamiliar with reverse mortgages until a client approached him with the idea three years ago. And some still cite the high upfront costs as a deterrent.
If a client has reached a point where they’ve run out of assets, they should sell their home and use the proceeds toward rent, says Colin Chase, a financial planner and owner of Mindful Money, Financial Counsel LLC, based in Chicago. He adds that in his experience, cost analyses have favored using home sale proceeds toward rent rather than drawing upon a home’s equity though a reverse mortgage.
“It would have to be on a case-by-case position,” says Chase. “If a client has lived in a house for a long time, and there’s no way they want to move out of it, and that was their number one priority, I would imagine I could talk about a reverse mortgage and the potential pitfall and considerations.”
While remaining at home is a strong consideration, the costs still outweight the benefits, says Connie Stone, co-founder of Stepping Stone Financial, based in Chagrin Falls, Ohio. She has looked into reverse mortgages a couple times, but has never found it to be a viable option.
“The reason is the expense,” she says. “It comes from my philosophy that tries to eliminate all hidden costs, taxes, and fees.”
However, after looking into the Home Equity Conversion Mortgage Saver program, she gained a slightly more positive perspective toward the product.
“If I was considering a reverse mortgage, I would definitely look at a HECM Saver mortgage,” says Stone, adding that she thinks it is important to be aware of the options available to her clients. “The lower upfront insurance premium cost is a plus.”
At this point in time, some are seeing the home as an important retirement tool, regardless of how it is used.
“For folks in their mid-70s or older, because of inflation, or children who have experienced economic challenges, it’s now time to say, ‘Hey, I gotta use that equity somehow,'” said Walker. “Forward mortgages in most cases are out of the question; qualifying is difficult because of their debt picture.”
Written by Alyssa Gerace