WSJ: Reverse Mortgages ‘Buffer’ Against Bear Market Risks

For retirees with substantial wealth invested in stocks, the current bear market is forcing them to think seriously about sequence of returns risk. If retirees fear outliving their assets, but don’t want to delay retirement by working longer, they can protect their investments in a number of ways, including using a reverse mortgage line of credit, according to a recent article from The Wall Street Journal.

Although the stock market has been on the rise for the past six years before 2015, recent market volatility since the beginning of this year has weighed down stock values. As a result, savers need to think about how they can avoid making early withdrawals from a portfolio that is facing declines.

The most obvious solution is to delay retirement and work longer. But while this can help retirees avoid withdrawing money when their portfolio is down, while at the same time adding funds to their nest egg, working longer is not always feasible, or desired for that matter.

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“Many people, however, don’t want to—or can’t—delay something they may have been anticipating for years,” writes Andrea Coombes for The Wall Street Journal, who provides several strategies retirees can take to mitigate bear market risk.

One of those possible solutions is tapping a “buffer” asset, which Coombes describes as an asset not directly tied to a retirement portfolio, such as home equity.

Coombes then cites recent research from Wade Pfau, professor at the American College and principal at McLean Asset Management, which has found that opening a reverse mortgage line of credit can help protect retirees from sequence of returns risk.

“Mr. Pfau’s research suggests opening a line of credit at the start of retirement, then letting it sit until needed,” Coombes writes, adding that Pfau describes the upfront loan costs as akin to an insurance premium.

A traditional home equity line of credit may be another option, especially for retirees looking for lower upfront costs, however, retirees without a current income source may not be able to qualify.

“Plus, with reverse mortgages backed by the federal government, the unused portion of the credit line grows over time based on the loan’s interest rate, and the lender can’t change the amount,” she writes. “That usually isn’t the case with home-equity lines of credit.”

The remainder of The Wall Street Journal article highlights several other possible solutions to help retirees avoid bear market risk, including the option to downsize, cut living expenses, lock-in income, among potential strategies.

Read more at The Wall Street Journal.

Written by Jason Oliva