Reverse Mortgages Play Vital Role in Planning for the Costs of Aging

Reverse mortgages can be used to serve a variety of needs in retirement, not the least of which is using home equity as an insurance tool to cover aging related expenses.

Today, Americans are living longer lives than ever. Thanks to advancements in modern medicine, the average life expectancy in the U.S. has grown steadily since the 1950s, from approximately 68.2 years to 78.8 years in 2013, according to the U.S. Census Bureau. But with this increased longevity also comes increased risk, particularly when planning for the future.

Such risk is only exacerbated as retirees face unexpected health issues that may arise as they age. The high price tag generally associated with medical costs, coupled with the sudden shock of a personal health issue, demands having a strategic retirement income plan in place—one that doesn’t ignore the value of housing wealth, according to several professionals in the financial services, gerontology and reverse mortgage sectors.

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The costs that retirees face during their non-working years can be broken down into two main categories: expected expenses (e.g. housing, food, health care coverage, including premiums and co-pays, etc.) and unexpected expenses (e.g. changes in health status, long-term services and supports, home modifications, home repairs, vehicle maintenance, etc.).

As people age and live longer, paying for health-related expenses stand to bear the heaviest financial burden on retirees.

For couples who retire at age 65, it is estimated that they will spend approximately $245,000 on health care expenses during their retirement, according to a recent study from Fidelity Investments. If this same couple wants a 90% chance of having enough money to pay for health care expenses in retirement, they will need to have saved at least $392,000 by age 65 to cover these costs, according to the Employee Benefit Research Institute.

“If you fail to plan for those expenses, you have planned to fail,” said Barbara Howard, adjunct professor of gerontology at the University of Bridgeport in Connecticut, during a webinar Tuesday.

The webinar, which was hosted by the American Society on Aging, is part of the inaugural Education Week initiative spearheaded by the National Reverse Mortgage Lenders Association. Through a series of webinars, Education Week aims to teach professionals who work with seniors about reverse mortgages and how these loan products can help meet their clients’ needs.

Tuesday’s webcast brought together Howard, a gerontologist, alongside Jamie Hopkins, associate professor of taxation at The American College in Bryn Mawr, Pa., as well as Dan Hultquist, an Atlanta-based Certified Reverse Mortgage Professional with Open Mortgage.

Together, each of these presenters discussed the use of home equity in retirement income planning, and how it can be used within the context of helping retirees plan for the costs of aging.

Hopkins, a frequent reverse mortgage commentator, likened retirement income planning to shooting a moving target in the wind. The “target,” which is being able to meet a client’s goals, is going to change over time, he said, but so will that person’s goals and the expenses they encounter on their path to retirement.

Meanwhile, the “wind” is all of the risks people face in retirement, including longevity, the need for long-term care and sequence of returns risk (to name a few)—all of which are going to influence the path it takes for workers to finally reach their future retirement goals from where they are today.

“However much we can reduce the wind, the easier it is going to be to plan,” Hopkins said. “Taking home equity into consideration can help reduce those risks.”

Reverse mortgages can fit into a retirement income plan in several different ways, Hopkins noted, whether it is simply providing retirees with additional cash flow, allowing them to defer Social Security, or helping them improve their systematic withdrawal strategy to reduce sequence of returns risk—a method that various research has highlighted using reverse mortgages as a standby line of credit.

“Home equity needs to be part of a comprehensive retirement income plan—and I stress needs,” Hopkins said. “It’s one of the biggest assets people have and it can dramatically improve the retirement income plan.”

Retirees can also use a reverse mortgage line of credit to reduce their tax liability, said Hultquist.

“Since draws from a reverse mortgage aren’t taxed, in later years you can withdraw from that to stay within your tax threshold,” he said.

Hultquist is the author of “Understanding Reverse,” a guidebook that provides answers to some of the most common reverse mortgage questions. In his work as a Home Equity Conversion Mortgage trainer, Hultquist frequently dispels misconceptions regarding reverse mortgages.

During Tuesday’s webinar, he gave an overview of the HECM program and discussed several of the most significant program changes, including the upfront draw limitations, Financial Assessment and changes to the non-borrowing spouse policy. He also fielded several questions from attendees curious about what happens to the reverse mortgage principal limit if home values drop; how reverse mortgages impact Medicaid eligibility; and what the benefit is to FHA for insuring the HECM program.

“[The HECM program] is designed to be a stabilizing force for retirement,” Hultquist said. “When you think of the pillars of retirement income—Social Security, savings and pensions—all three of those have issues. Social Security might not be enough to supplement people’s needs; fewer people have pensions now; and Boomers have a disproportionate amount of wealth tied up in real estate and not in savings. The HECM program was another form to allow people, especially Boomers, another form of retirement income.”

Written by Jason Oliva

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  • Great article Jason. This is what our industry needs as far as good publicity and these types of webinars on a continuing basis.

    We have to start using the HECM as a retirement tool, more now than ever! We are not to use HECM as a last resort tool anymore. We now have new found opportunities waiting out there for all of us to capitalize on.

    I like the way the article mentioned various ways the HECM can be used as a retirement planning tool rather than just as a stand alone HECM.

    As our seniors age, alleviating debt such as existing mortgage payments or long term medical bills can add the additional cash flow in the seniors monthly budget to meet expenses. It may not be actual income because it is using an asset to receive additional cash flow but to the senior, believe you me, it is extra income to use for their retirement years!

    I notice we are seeing many more articles along these lines coming out from the Reverse Mortgage Daily and Jason, as well as from other industry publications. This is great news and these articles are great marketing pieces for all of us to use in our sales presentations.

    John A. Smaldone
    http://www.hanover-financial.com

    • John,

      You purport: “It may not be actual income because it is using an asset to receive additional cash flow but to the senior, believe you me, it is extra income to use for their retirement years!”

      When someone tells me how much cash they have in the bank, they never say: “I have this much income, this much from gifts, this much from saved expenses, and this much from winnings from my church bingo games.” No they tell me how much cash they have in the bank, period. So how are loan proceeds suddenly income to HECM borrowers? They are cash. Too many times we are want them to see it as income. Why? So that they get past the fact they going deeper into debt by using the proceeds.

      Paying off debt does not produce increased cash flow forever. It simply produces it for the time that debt payments would have otherwise been required. In other words if only two months of mortgage payments are remaining on a mortgage and the HECM pays off the balance due, will that payoff create $1,000 (assuming that was the monthly payment of interest and principal) in additional cash flow beyond the next two months? How silly. If the payments would be required for the next ten years and they are now 62, assuming all else the same, will the payoff of the existing mortgage create $1,000 per month when the borrowers are 76? Absolutely not!

      Let us put misleading double talk (it is not actual income but it is income) in the grave where it belongs.

  • I agree, John. I feel this initiative is beginning to pick up speed. It’s not easy. But, we have multiple researchers on the academic side to support our claims. We have the reverse mortgage media in Jason, Liz, Shannon, and others writing every day. We have a trade association that has a renewed focus on education. This is a grass roots movement that doesn’t require massive advertising budgets.

    • Mr. Hultquist,

      Interesting and good comment.

      As a pragmatist if an initiative does not increase endorsements it needs to be discarded.

      The Extreme Summit failed to gain traction and it was wisely dropped. The question is will the new education week create sufficient buzz by only occurring once a year? Perhaps it is intended to be done quarterly but so far there does not seem to be any indication of that.

      Yes, it may be a low cost initiative but what about its other costs in time and use of high powered personnel. That may turn around over time but is such an education effort more frequently needed right now to get a good start and is that a good allocation and use of the time of those currently involved in this initiative? Results sell. So let’s give it a chance but be decisive in extending or not extending its life.

      Although many of us enjoy the work of the reverse mortgage media personalities you mention, how far do their efforts extend? I am not all that sure they are being utilized to their best and highest use in regard to outreach to those outside of the industry.

  • Are debt proceeds a means to improve retirement income? That is generally nonsense.

    Let us say my employer gave me a personal loan of $60,000 for which repayment will not start for five years unless I quit before then. So can do you really thing that $60,000 is additional income or just a loan? Can I put it on mortgage documents as salary? If not, what kind of income is it? Make believe?

    Are gains from the sale of stock, income or gains? Using the Standby HECM Strategy as a means to defer recognition of a LOSS, will that somehow improve retirement INCOME? What that strategy does is help reduce the need to decumulate assets at a time when the sale will result in the exchange of more assets for the same amount of money as at a time when the same assets were or will be worth more money.

    Even the literature used in CFP education required to qualify for the CFP exam, makes clear distinctions between income, cash flow, gains, losses, and other financial terminology. The topic of retirement income planning was never designed to incorporate debt proceeds.

    In reality the topic should be retirement cash flow planning because the topic in reality encompasses far more than income.

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