Reverse Mortgage Line of Credit: A ‘Powerful’ Retirement Tool

The line of credit feature on a reverse mortgage has garnered considerable attention lately for its usage as part of a coordinated retirement planning strategy. And for many people, a reverse mortgage line of credit can be ‘the most powerful tool,’ according to a recent The Dallas Morning News column.

A reverse mortgage line of credit can be especially valuable for retirees who own a nice house and don’t have any debts, but aren’t satisfied with their savings as they approach retirement, says syndicated columnist Scott Burns, who is also a principal of the Plano, Texas-based investment firm AssetBuilder, Inc.

“Indeed, if you are looking for a big lever, a reverse mortgage line of credit will be the most powerful tool available for many people,” Burns writes in The Dallas Morning News column.

Advertisement

With the help of ESPlanner, a financial planning software for individuals and financial planners, Burns provides several scenarios of fictitious couples and how a reverse mortgage line of credit can bolster their consumption in retirement.

In one scenario, an already retired couple, ages 76 and 77, has a home worth $443,000; savings of $150,000; and $2,000 per month in Social Security benefits. If they decide to “do nothing,” Burns says they will have $30,300 a year in constant purchasing power for the rest of their lives. 

“But if they take out a reverse mortgage line of credit, their lifetime consumption will rise to $45,700 a year in constant purchasing power,” Burns writes. “That’s a 50.8 percent increase in the money they can spend on daily living.”

In another scenario, Burns notes a couple that recently lost their jobs before they retired. The couple, aged 65 and 67, has $2,000 per month in Social Security benefits; only $70,000 in savings; and own a home worth $200,000.

“If they do nothing, their lifetime consumption will be $20,000 a year in constant purchasing power,” Burns writes. “But if they take out a reverse mortgage line of credit, their lifetime annual consumption will be $25,900 a year. That’s a 29.5 percent increase.”

In a previous column, Burns wrote about what he calls “the thinness of wealth,” specifically about how 80% of all households have more money in home equity than they do in their combined financial assets and retirement accounts.

“Think about that—80 percent,” Burns writes. “It tells us that whether it is a reverse mortgage, downsizing, right-sizing, renting or living in a trailer, our shelter decisions will make the difference between retirement squeeze and retirement comfort.”

Read The Dallas Morning News column.

Written by Jason Oliva

Join the Conversation (1)

see all

This is a professional community. Please use discretion when posting a comment.

  • The problem with the Vezza model is much the same as the HECM model back in fiscal 2008. Using a 3% inflation rate is far too subtle. Yes, in fact, the inflation rate can average 3% BUT it is an average. We talk about sequence of earnings, here the issue is sequence of inflation factors. The higher the inflation variable early in retirement, the more harmful the result overall.

    Vezza also uses a 6% rate of return. There is no safe asset in the investment marketplace which offers that kind of return. So seeing that means that we are looking at sequence of earnings issues. Yet Burns does not address that.

    Burns then makes a rather odd statement: “In May I wrote about ‘the thinness of wealth’: how about 80 percent of all households had more money in home equity than they had in their combined financial assets and retirement accounts.”

    Households have no money in home equity. What they have is value which must somehow be liquified into cash if it is to be used to meet needs in retirement. Liquifying home equity generally has significant costs. It is not stocks or bonds which also have liquifying costs but such costs are generally lower based on proceeds received.

    While the concept and use of software is critical in looking at retirement, one must carefully look at assumptions like the inflation rate and earnings rate. For example, Social Security will not rise by even the inflation rate (in this case) over the long run.

string(103) "https://reversemortgagedaily.com/2015/10/26/reverse-mortgage-line-of-credit-a-powerful-retirement-tool/"

Share your opinion