Home Equity Provides Longevity ‘Safety Net’ in Retirement

Retirees want the financial security of knowing they won’t outlive their money in retirement. As they prepare to live off their assets during their non-working years, many retirees continue to rely on sources of income that are guaranteed for life, and this could include looking at the use of reverse mortgages as a longevity safety net.

Both retirees and pre-retirees place a high value on guaranteed lifetime income, with almost half spending at least $3,500 per month from guaranteed income sources, such as Social Security, pensions and annuities, according to the Guaranteed Lifetime Income Study released this month by market research firm Greenwald & Associates and CANNEX, an independent data provider to the financial services industry.

In compiling the second annual study, Greenwald and CANNEX surveyed consumers aged 55 to 75 who have at least $100,000 of investible assets.


While nearly half of survey respondents reported spending $3,500 each month from guaranteed income sources, as many as 41% said they do not spend any money at all from their non-guaranteed assets.

These findings demonstrate that most retirees reject the “life cycle theory” generally favored by economists and endorsed by many financial planners, said study author Matthew Greenwald, president and CEO of Greenwald & Associates.

“That theory predicts that when people retire they want to systematically spend down their assets,” Greenwald said in a written statement. “We found that most retirees feel it’s important to preserve their asset levels if they can, and many cut spending to do it.”

The findings also suggests that once people retire and stop earning income from work, Greenwald said, they are most comfortable getting income from a “renewable financial source” that provides lifetime income that cannot be outlived, such as Social Security, pensions and annuities.

But while some annuities do offer the promise of guaranteed lifetime income, many pre-retirees and retirees aren’t familiar with these financial products. Just 15% of survey respondents knew that annual payments from immediate annuities are higher than payments from the highest rated bonds, while only 32% knew that immediate annuities generally cost less for those who purchase them later in life.

The survey also revealed that many consumers also avoid annuities for fear of not having access to their money should they need it, with 90% of those without annuities that offer guaranteed lifetime income identifying “access to money” as a reason for not owning one.

But what about reverse mortgages? Though the survey did not mention reverse mortgages specifically, these financial products may also feed into consumers’ desires for guaranteed lifetime cash flow.

Reverse mortgages and life annuities can help retirees extend the life of their assets during retirement, thereby insuring against the risk of running out of money.

Unlike an annuity, which is an asset, a reverse mortgage is considered debt, since the loan ultimately needs to be repaid. Residency requirements on a reverse mortgage also demand that borrowers remain living in their home in order to continue receiving loan disbursements, whereas an annuity could still pay out even if the policy holder relocated from their primary residence.

For many Americans Social Security is the only guaranteed income for life they receive, so it will be important to look at strategies that optimize it, including looking at home equity as part of the retirement toolbox of solutions, according to an article published last September in the Journal of Accountancy.

“CPAs can also help clients evaluate home equity as a longevity safety net,” said CPA Jean-Luc Bourdon, CPA/PFS, principal and wealth management practitioner for BrightPath Wealth Planning LLC. “We get to a point where many clients do face running out of money, and it’s important to address the question of what to do then. Selling the home or taking a reverse mortgage to utilize home equity can be one answer.”

Written by Jason Oliva

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  • Great article! This is an article I will make a copy of and spread it around to clients, to originators reporting to me and to my colleagues who have not seen it.

    Can’t get much better of a marketing sales piece to use than this article as a retirement planning tool. This article should also get many financial planners and advisors to take notice, especially since the new DOL ruling came out for them!

    Not to much more I can say on this one, job well done Jason!

    John A. Smaldone

    • John,

      The DOL has announced a change that becomes applicable in slightly less than a year from now.

      The timing of the rule is much like when HUD notified us of the addition of financial assessment 20 months before it got implemented. The DOL rule was officially proposed 12 months ago and will not be applicable for about 12 more months.

      DOL has yet to tell us what prudent alternatives are. Right now the use of home equity through a HECM would not be considered a prudent alternative under current DOL standards. The word fiduciary is not a new concept under ERISA but how DOL wants to expand it is. Prudent is not a new word under ERISA but how DOL wants to expand it is.

      Presenting prudent alternatives is part of meeting the expanded fiduciary standard. Yet there is no current indication that DOL would consider taking out a mortgage or using mortgage proceeds as a prudent alternative.

    • Tom,

      What are you comparing?

      Annuities guarantee interest rates for longer periods of time than most bonds depending on the estimated life of the annuitant. Annuity risk is higher for insurers than bond risk for borrowers. So while you can be right, high grade bonds pay little such as federal bonds.

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