Forbes Highlights Academic Acceptance of Reverse Mortgages

Reverse mortgages have caught the attention of several academic researchers in the past few years for their use within retirement income planning strategies. One particular piece of research, which highlights the strategic use of a reverse mortgage credit line, recently found its way into a Forbes article on the academic acceptance of home equity use in retirement.

The article focuses on the research of Harold Evensky, Shaun Pfeiffer and John Salter of Texas Tech University, who in 2012 published two articles investigating the role of a standby Home Equity Conversion Mortgage line of credit.

Specifically, the research examined the use of a HECM Saver line of credit as a “ready source of cash” to be used as a risk management tool for retirement distributions, writes frequent Forbes contributor Wade Pfau, professor of retirement income at The American College. 


Similar to research published by Barry Sacks and Stephen Sacks that same year, which demonstrated a reversal of the conventional wisdom for home equity use, the Texas Tech researchers had the objective of developing a coordinated strategy for using a reverse mortgage when the investment portfolio was in jeopardy.

“Rather than drawing from the reverse mortgage standby line of credit after years of market downturns, they instead drew from the line of credit whenever the remaining portfolio balance fell below the value indicated by a separate wealth glide path calculation,” Pfau writes. “They determined the amount of remaining wealth required for each year of retirement to keep the spending plan on a sustainable path through the desired planning horizon.”  

Texas Tech researchers determined that drawing from the reverse mortgage worked best when remaining wealth fell to less than 80% of the wealth glide path.

“This helped avoid overuse of the line of credit while still providing a mechanism to avoid selling financial assets at overly depreciated prices, thereby helping mitigate the sequence of returns risk,” Pfau writes.

A key difference between this research and that of the Sacks brothers, Pfau notes, is that whenever remaining wealth grew to be above the 80% barrier for their critical path trajectory, Evensky and researchers worked to preserve a larger line of credit for future use by paying back any outstanding balance on the line of credit throughout retirement.

“As with Sacks and Sacks, they found that using the standby line of credit improved portfolio survival without creating an adverse impact on median remaining wealth (including remaining home equity),” Pfau writes. “This provided independent confirmation that the reverse mortgage line of credit can help mitigate sequence of returns risk without impacting legacy goals.”

Read more at Forbes.

Written by Jason Oliva

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  • Looking at the beginning of the article, Dr. Pfau summarizes not just the article by Mr. Evensky, Dr. Pfeiffer, and Dr. Salter but provides a backdrop to the underlying reason for the initial research by Mr. Evensky.

    What Dr. Pfau leaves out by not specifically using the title given to the strategy proposed by Mr. Evensky is the distinction of a Standby Reverse Mortgage (or more specifically Saver) in relation to other standby lines of credit taught in finance schools for decades. By drawing on the unique features of a HECM, a Standby HECM (today an even better name for the strategy) makes other lines of credit strategies for retirees pale in comparison.

    Not only is Dr. Pfau fair in the article, he really draws upon the history surrounding the development of various strategies to enhance our understanding of them. However, he does not delve into alternative strategies developed by people like Dr. Wagner.

    • Jim,

      My compliments on your comment, I feel you nailed the differences, right on the head! And in this case, pointed out perfectly fairness Wade Pfau displayed in his article.

      Thanks Jim,

      John A. Smaldone

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