The benefits of using a reverse mortgage as a potential “buffer asset” to stave off sequence of returns risk in retirement will be highlighted in a new paper published in the Retirement Management Journal (RMJ).
The paper, “An Alternative Asset to Buffer Sequence of Returns Risk in Retirement,” is the work of reverse mortgage industry veteran Shelley Giordano, chair of the Funding Longevity Task Force and author of the book “What’s the Deal with Reverse Mortgages?”
In her paper, Giordano introduces academic research suggesting various methods to manage sequence of returns risk through the use of housing wealth, particularly when using a reverse mortgages as an “alternative buffer asset,” to coin term used in recent research by Wade Pfau, Ph.D., CFA and professor of Retirement Income at The American College.
A reverse mortgage can be used as a “buffer asset” when a borrower utilizes a Home Equity Conversion Mortgage early in retirement, rather than delaying acquisition until the borrower’s portfolio has been depleted.
By obtaining a HECM line of credit, the borrower is able to “buffer” their investments during years when their portfolio experiences negative returns. The idea is to draw upon the HECM credit line in these circumstances instead of selling off certain investments, such as stocks, in efforts to weather market volatility.
“Organizations like the Retirement Income industry Association (RIIA) are challenging conventional wisdom as they search for ways to improve the household balance sheet for American retirees,” Giordano told RMD. “This paper dovetails with the Association’s concern that negative early sequence of returns can inordinately jeopardize the portfolio.”
Giordano’s paper brings together findings from other researchers, including Barry Sacks, Harold Evensky, Gerald Wagner, Wade Pfau, among others—all of which have published research on reverse mortgages and the role home equity plays when used as part of a coordinated retirement income planning strategy.
“Work published by Dr. Barry Sacks, and other members of the Funding Longevity Task Force, suggest that housing wealth can mitigate that [sequence of returns] risk if the client sets up a reverse mortgage at the outset of the distribution phase,” Giordano said.
The paper will be published in the upcoming issue of the RMJ, due July 2016. RMD will report on the full findings once they are made public.
Written by Jason Oliva