New Study Shows ‘Buffer Asset’ Benefits of Reverse Mortgages

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

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  • Is the following really what either Dr. Pfau or Ms. Giordano intend? “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. (sic)”

    Let us be clear the basic concept (but not its name) has merit. In the hands of the right seniors it could make a huge difference in their retirement experience long-term even though it is nothing more than the leveraging of another asset to support the senior’s investment portfolio. There is nothing wrong with rightfully promoting it as long as full disclosure of the leveraging nature of the transactions are fully disclosed; there is little doubt that is exactly what both Dr. Pfau and Ms. Giordano intend on doing. The trouble is using the name “alternative buffer asset” in describing either a reverse mortgage or home equity is horribly misleading.

    Can home equity even be an asset in this strategy? While home equity is very much a part of obtaining a HECM (or other reverse mortgage) home equity has no application in the use of HECM proceeds in the practice of the buffer strategy, once the HECM is closed. Home equity could be negative but that absolutely has no bearing on when and how this strategy is used. The only thing one is concerned about in applying this strategy is available proceeds at the point in time needed, not how much the equity of the home is (unless a HECM refi is under consideration but that again is generally a separate transaction).

    So then it must be that either Dr. Pfau and Ms. Giordano are calling the HECM itself, the alternative buffer asset, or they have simply made up a name that sounds good but has no practical application to this strategy. It is the latter case which seems to be what is going on.

    While there is some certainty as to the meaning of the term “buffer state” when applied politically to a nation, what is the meaning of an “alternative buffer asset” when it comes to a HECM in the hands of the borrower? We cannot be talking about available proceeds since they are not the asset of the borrower until taken by the borrower. For example, all assets of a borrower can be passed to heirs upon death including reverse mortgage cash proceeds entering the bank account of the borrower just moments before death. Yet all cash available to the borrower in a reverse mortgage line of credit are normally cut off from inheritance at the moment of the borrower’s death. Proceeds not taken from the line of credit are referred to as contingent assets of the borrower because there is a procedure which must be accomplished before the cash “belongs to” the borrower. Up until death, the borrower has a right to the cash but at death to the extent that right was not exercised, it is by the terms of the mortgage extinguished.

    There is no problem calling the idea that both Dr. Pfau and Ms. Giordano want to get across, “the reverse mortgage buffer strategy.” It could be called the double banana peel extravagance rather than the alternative buffer asset as well but it would lose its glossy translucent Madison Avenue appeal but would have about as much meaning. While I support the strategy for the right seniors, the name it is called in the post above is clearly misleading and must be changed to be readily accepted and adopted by the more prominent financial and legal advisers.

    • I hope a few “more prominent financial and legal advisers” will see this post and offer their thoughts confirming or refuting Mr. Veale’s contention.

      I would argue in support of Pfau and Giordano that home equity is, in fact, an asset – albeit illiquid – and the HECM program simply a tool to – among other uses – convert that asset to beneficial use as described. The fact that one is borrowing against the asset rather than using it outright, with the resulting finance charges, does nothing to diminish the potential benefit in mitigating sequence risk to an investment portfolio. The cited studies all reference and/or take into account the effect of the related finance charges on resulting terminal wealth.

      The phrase “volatility buffer” has been used extensively in the insurance industry to describe a similar potential portfolio-protecting use of the cash value of life insurance. (Admittedly, such cash value might be considered a more direct “asset” since its use does not result in finance charges, but one might argue that the “finance charge” in tapping this asset is the future growth one forgoes by tapping it.) I imagine it is in this context that Pfau and Giordano have suggested HECM LOC proceeds as an “alternative”, and the use of the word “asset” is broadened to include something that can be put to a beneficial use.

      • REVGUYJIM,

        Unless one is discussing legal title to the home, home equity is the answer to a math problem. that can be positive or NEGATIVE. If it is negative that means that the current sum of all balances due of all liens against the property exceed the value of the property. How is a negative value, an asset? It seems for many this is a difficult concept to grasp but home equity is not an asset.

        When the home is collateral for a debt, when can a reverse mortgage borrower, borrow against the current home equity. That is not possible, since the reverse mortgage (especially HECMs) must be the first lien in foreclosure priority. One is borrowing against the value of the home, unrestricted by debt.

        Again in the context you are using, it is the difference between the value of an asset, the collateral, and the total balances due on all liens against the property. On the household balance sheet recommended by the RIIA, assets are in one area and their total must equal the total of all liabilities (i.e., debt) and equity.

        To say that a debt has some benefit to the borrower may or may not be accurate, but that benefit is not an asset. That is true even if the benefit of a debt is less cost to the borrower.

        You and those who would like to change the financial and accounting definition of the word asset could always appeal to the AICPA but for now a debt of a borrower is not also an asset to that borrower. That is utter nonsense.

      • The following from Wikipedia:

        “One of the most widely accepted accounting definitions of asset is the one used by the International Accounting Standards Board. The following is a quotation from the IFRS Framework: “An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.”

        Let’s assume this broader definition of “asset” is the one intended, and that we can substitute “individual” for “enterprise”.

      • REVGUYJIM,

        And how exactly does the borrower control the resource? And what “benefits are expected to flow to the individual?”

        The only thing that can be expected to flow to the borrower (or heirs) is a payment on the balance due. How exactly is that a benefit to the borrower?
        Who controls the resource? Let’s see. Who can sell it? Who can assign it? Who has the right to call the balance due when a default or other triggering event occurs? Who can forgive a default?

        A reverse mortgage is a debt to the borrower and an asset to the lender/note holder. It is just that simple. Thank you for providing a definition that proves the point.

      • No point in pursuing this. Your narrow definition denying housing wealth as an asset to a homeowner perhaps explains its underutilization in that capacity…to the detriment of those who view it thus.

      • REVGUYJIM,

        If you cannot tell me that home equity will always be greater than zero, how can you name it an asset? The home is an asset, no matter how much is owed against it but the debt against it, how can that be an asset? A reverse mortgage is just that, a mortgage, i.e., debt. Trying to break a reverse mortgage down into neutrons, does not make it any part of it an asset.

    • James,

      Let’s expand your comment. Aren’t those who use the strategy basically playing the sum of dividends and growth vs. cost accrual game? Not only is this a levering tactic but it is also a dangerous to use leveraging to either acquire or carry investments in retirement. If there is a loss, it is hard or impossible to make it up in retirement without taking on even greater risk.

      Where there is less risk TODAY in using a HECM for this purpose instead of other debt such as a margin account, what about the risk of higher HECM interest rates in the future? And what happens if the perfect storm occurs, long-term loss with rising HECM interest rates? Yes, the loss from HECM accrued costs will not have to recognized until the home is sold, but the loss also increases from not paying off the balance due. And remember if we are dealing with the mass affluent, this will reduce the size of the estate they will leave their heirs and all because the retiree who is risk adverse was talked into the strategy due to a name for a strategy that conceals its true nature.

      Personally even your “reverse mortgage buffer strategy” name is suspect. This is leveraging plain and simple. Other names simply hide the real risks.

      • RMMyths,

        You have taken a rather interesting position. It is quite conservative, almost fiduciary. Yet leveraging can result in positive results as well.

        In order to measure risk, the two dependents are 1) probable growth plus income from the assets which are attempting to be “protected” and 2) the total costs from using the buffer strategy. Depending on the risk tolerance of the senior and the amount of loss the senior can endure without a meaningful reduction to cash flow,

        Our job is presenting possible uses of a HECM with full and adequate disclosures yet without misleading consumers as to its benefits. It is the job of responsible and competent financial advisors to do as you have done although your position is commendable.

  • I read the article and read my friend, Jim Veal’s comment. I did get a kick out of the way Jim explained it but he is right on target!

    The other thing to look at is that what Shelley Giordano’s paper is promoting, which again is more positive publicity on the reverse mortgage.

    Jim Veale is right, it is not the name being used that makes this a huge difference in a seniors retirement experiences. Much of this plays hand and hand into the philosophy of the financial planner/advisor, which is playing more of a roll in our business activities these days.

    The financial planner can relate to the term “Buffering a seniors assets” or better known as a hedge against one’s alternative assets.

    The financial planner/advisors world is coming over to our end of the spectrum when it comes into coordinating the HECM into their retirement income planning strategy. We all need to take this seriously and understand their strategy when dealing with these professionals!

    I will be looking forward to seeing Shelley Giordano’s paper being published in the upcoming in the July issue of the RMJ. I will be looking for Jason to report on the full findings once they are made public.

    John A. Smaldone

    • John,

      Like you I look forward to seeing the actual writing of Ms. Giordano. While I narrowed the first comment to just one of the strategies, it will be interesting to see so many of them in one post.

      Enjoy the 4th.

  • In looking back at stories that RMD has reported on this specific subject, there was one written by Ms. Ecker and posted on 9/3/2015 that stated the following:

    “The strategy is one that some financial planners have touted in recent years as a ‘standby’ strategy to weather market swings.”

    So why is there a need to use the name, “alternative buffer asset?” As to borrowers, NO type of reverse mortgage is an asset and this name is nothing more than added confusion to a fairly complex financial product which most consumers find difficult to fully comprehend in a single meeting. As to borrowers, all types of reverse mortgages are DEBT.

    The post by Ms. Ecker summarizes an article in the WSJ in which even Dr. Pfau is quoted. The title of the RMD post is “WSJ: Reverse Mortgage Can Help Buffer Against Market Swings” and can be found at:

    • I’m struggling with this, too, Jim. A few thoughts.

      Reducing the percentage of a portfolio that a retiree spends each year (withdrawal divided by portfolio balance) will always decrease sequence risk. If we add $100,000 to our portfolio from whatever source, we decrease sequence risk by -> decreasing the withdrawal percentage by -> increasing the portfolio balance in the denominator. (Adding wealth.)

      We planners don’t typically include home equity in the denominator because it is illiquid. Making it liquid with a HECM or selling or any other transaction means it can be added to the denominator and will decrease sequence risk. In fact, if your parents leave you $100,000 it decreases your sequence risk by the same amount as the other transactions.

      To that extent, making the home equity liquid with a HECM clearly reduces sequence risk. Does borrowing it based on market returns (i.e., only in bad years) further reduce sequence risk? That isn’t clear to me, yet.

      The idea of a buffer asset appears to be an attempt to reduce risk by avoiding selling stocks during a bear market. The retiree whose stocks have fallen in price in this scenario have two choices that we are considering. He can sell stocks at low prices and reduce his market risk by reducing his stock exposure. Alternatively, he can leverage his portfolio by spending from the HECM and increasing debt while maintaining his same equity exposure. Clearly, there is less market exposure (market risk) if the retiree sells from the portfolio than if he takes on debt.

      If the portfolio recovers because the market “reverts to the mean” (an arguable, though not certain prospect), the leverage will pay off and the retiree will gain. If the market continues to fall, the retiree will lose wealth even faster (he leveraged his portfolio).

      Regardless, the retiree’s ultimate results are dependent upon portfolio returns. And, it seems clear that this strategy leverages the portfolio, increasing potential gains and magnifying potential losses. (Leverage makes it riskier.) It also seems to me that the leverage uses the retiree’s home as collateral.

      (As an aside, if this works we should be able to reduce sequence risk with a margin loan using our stocks as collateral, which we probably wouldn’t advise.)

      I’m studying this strategy and conversing with both Dr. Pfau and Ms. Giordano. I don’t believe either of us has yet convinced the other. Until I’m convinced, I don’t plan to recommend it as a retirement strategy, though.

      While the definition of home equity as an asset may sound unimportant, I am finding in my conversations that such nuances are complicating our understanding. I am not an accountant, but I don’t think home equity would show up in the asset column of a balance sheet. The home’s FMV would show up as an asset and any mortgage would show up as a liability, as I recall. Home equity would be the difference and that could result in a net asset or a net liability but neither would be a balance sheet entry.

      The asset here is the home. The HECM is a debt/liability. Borrowing from the HECM instead of selling from a portfolio increases debt and creates leverage (financial risk).

      I feel pretty certain that a HECM can reduce sequence risk, as I explained above. I am far less convinced that using it based on last year’s market returns provides further improvement. And I don’t see how it is ultimately not borrowing against one’s home to invest in the market.

      I’m thinking out loud and welcome anyone’s thoughts on the subject.

      • Mr. Cotton,

        Home equity is the name to the answer for a common real estate subtraction problem. If home equity can be an asset then it can also be a liability but that creates confusion. The home is an asset and its liens are liabilities. Home equity is neither an asset nor a liability; again it is the name of the answer to a real estate subtraction problem, not the title of an asset.

        There is much Dr. Pfau and I do not agree about. He freely calls HECM proceeds income. Yet there is a clear distinction and difference between earnings and debt proceeds. One of the two normally does not have to be repaid and the other does; I call that a huge difference and those calling HECM proceeds income as verging on fraud. It is my belief that income is a very important part of cash inflow but income is not the same as cash inflow. Treating them as the same in public and admitting to their differences in private is no help to anyone other than those who want to remove the stigma of debt from reverse mortgages but using this means is despicable.

        For four years, I have been told that the HECM strategies being promoted are not leveraging because NO portfolio assets are being acquired with the HECM proceeds. When presenting the idea that there are different forms of leveraging, the strategy promoters end the conversation.

        Again, calling the coordinated strategy just another form of leveraging, once again reminds the public that HECMs are debt. In demonstrating that it is leveraging, I start with a summarized balance sheet. Then I use a model of someone selling portfolio assets (with no consideration for income tax) throughout the year to generate cash and then buy back those same assets at year end with HECM proceeds, assuming (as is assumed in most of these strategies) that the price of the portfolio assets only changes on the first or the last day of the year. Then I simply do the same thing all over again but the second time show that the proceeds are drawn and consumed directly by the borrower every month. I then compare the summarized assets and liabilities of both asking what is the difference between the beginning and then the ending balance sheets of each example. Then I label the first example as leveraging and then label the second as “Not Leveraging?”

        The difference between my view of leveraging and those who fight calling aspects of the HECM strategies leveraging when the debt proceeds are not used to purchase portfolio assets is that I openly and strongly advocate the judicious use of leveraging in the land development business and for the building industry. Some people call it using OP(iu)M or other people’s money; cautionary language is well deserved since the risk is high even for the most experienced.

        Those who promote the idea that the HECM strategies to reduce sequence risk are NOT leveraging generally describe themselves as optimists. As a realist with a positive outlook, this strategy may not be leveraging according to their definition of leveraging but if one uses the normal concept of leveraging, yes, the strategy does result in leveraging the home in order to keep a portfolio in place.

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