Reverse Mortgages Are the Epitome of Retirement Planning Efficiency

Effective retirement planning allows investors to maintain their lifestyles while also preserving a greater legacy. When it comes to creating a retirement income plan that achieves both of these goals, reverse mortgages are the epitome of efficient planning, says one retirement income expert.

There has been considerable research in recent years demonstrating the effective use of reverse mortgages in retirement income planning. In various article, papers and reports, researchers have emphasized the different ways housing wealth can be incorporated into a coordinated retirement strategy—the common undercurrent running through all of this research being the need to reverse the conventional wisdom of using home equity as a retirement tool.

Efficiency, as economists explain it, is measured by the ability to spend more while preserving more legacy at the same time. Considering this principle, reverse mortgages can effectively help retirees accomplish both objectives, according to Wade Pfau, professor of retirement income at The American College in Bryn Mawr, Pa., and principal at McLean Asset Management in McLean, Va.


“As I started to learn about reverse mortgages, that was the key, interesting aspect to them,” Pfau said last week during the National Reverse Mortgage Lenders Association eastern regional conference in New York City. “A reverse mortgage can allow for more efficient retirement income strategies, allowing you to spend more and/or preserve more legacy at the same time.”

Americans today face many challenges in preparing for retirement. While some may have saved too little, others may not have saved at all. At the same time, both retirees and pre-retirees have a number of assets under their belts, including IRAs, 401(k)s, Social Security and in some cases, pensions.

This group also has a sizeable stockpile of housing wealth to draw upon. Recent data indicates the aggregate amount of home equity held by U.S. seniors to be at least $5.83 trillion, however, this lucrative source of housing wealth remains a sacred cow that many people are just not yet willing to sacrifice, even if it is for their own benefit.

Contrary to popular belief and conventional wisdom regarding home equity use in retirement, research has shown that, net of all costs, financial planners can actually improve their clients’ success with a reverse mortgage.

“This should be very attractive to the financial planner,” Pfau said.

In research published last fall, Pfau expounded on previous findings from Barry and Stephen Sacks, which legitimized the effectiveness of using reverse mortgages as part of a coordinated retirement income plan, rather than as a last resort to be used only when a person’s investment portfolio has been depleted.

Pfau’s research explored six different methods for incorporating home equity into a retirement income plan through the use of a reverse mortgage. A key finding demonstrated how opening a reverse mortgage line of credit at the beginning of retirement—delaying its use until the portfolio is depleted—created the most downside protection for the retirement income plan.

By implementing this strategy, the retirement portfolio has a 90% chance of success after a 30-year period, that is, assuming a 4% post-initial tax withdrawal rate, along with a $1 million portfolio, a $500,000 home and 25% marginal tax rate.

When compared to using home equity in the conventional last resort sense, the same portfolio would have just under a 70% probability of success after 30-years spent in retirement.

“Conventional wisdom strategies are the worst strategies for using home equity,” Pfau said during last week’s event.

Probability of success is only part of the story, Pfau said, the other part being the impact on legacy wealth, or how much do retirees preserve as liquid financial assets that they can either provide for contingencies or for their heirs as part of their estate plans?

Legacy wealth is the remaining balance of an investor’s 401(k) or IRA, plus any remaining home equity after paying off the reverse mortgage loan balance, Pfau noted.

Employing a strategy that uses a reverse mortgage as a standby line of credit enables retirees to mitigate sequence of returns risk, which is the risk of receiving lower or negative returns early during a period when withdrawals are made from a person’s investment portfolio. In this strategy, the reverse mortgage serves as a buffer, enabling retirees to draw on the credit line during years when their portfolio experiences negative returns, thus helping them avoid selling assets, like stocks, for lower than their worth.

“When you have to spend a bigger percentage of your portfolio, you are creating more sequence of returns risk for yourself,” Pfau said.

By leaving the investment portfolio intact, Pfau notes that retirees are able to preserve these assets and offset how much they need to take as distributions from their investments.

Helping retirees mitigate sequence of returns risk is the crux of making the case for reverse mortgages in retirement planning, as well as reversing the conventional wisdom regarding home equity use.

“The conventional wisdom of how financial planners treat reverse mortgages hurts the retirement sustainability of their clients,” Pfau said. “The strategic use of a reverse mortgage can improve retirement sustainability and can allow for a larger legacy—it’s a more efficient strategy.”

Written by Jason Oliva

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  • Well written article Jason, the more articles like this that comes out by Forbs and other publications will continue to add strength and credibility to our product.

    The financial planners and advisors are taking an ever increasing interest in the reverse mortgage and how to integrate it into their daily investment strategies with their clients.

    The latest ruling by the Department of Labor (DOL) having to do with allowing financial planners to talk about reverse mortgages is a major plus for us. This now allows the creation of a fiduciary responsibility between financial planner and client and in return they can now charge a fee for this service.

    This opens a great opportunity for all of us in the reverse mortgage space to approach financial planners, team up with them, assist and help educate them on the intricacies of the reverse mortgage product.

    The financial planner will welcome your offer with open arms to be their mentor, where reverse mortgages are concerned. In return, you have a solid referral source and a professional to team up with to put on educational workshops for seniors in your community.

    Wade Pfau’s comments and articles in Forbs is a great tool to use when approaching financial planners. Happy hunting my friends.

    John A. Smaldone

    • John,

      Your comment correctly reflects the level of desperation in which our industry finds itself today. We have a more expensive, complex, less desirable, and more restrictive mortgage product than we have ever had. “The old gray mare, she ain’t what she used to be.” But that does not mean she cannot work or work well. She certainly is safer for the user but she is harder “to rent out.”

      Since when does the authority of DOL extend beyond retirement plans? Neither a principal residence nor a HECM under present law can ever find their way into retirement plans that DOL regulates.

      Is it prudent to borrow to live on or to hold onto investments or pension assets by leveraging? Of course this question will not be answered by our industry or HUD/FHA but by DOL alone.

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