A paper published in the Summer 2016 issue of Retirement Management Journal examines prominent research on the various strategic uses for reverse mortgages in retirement income planning.
Using a reverse mortgage to manage sequence-of-return risk and reverse dollar-cost averaging is the central theme of the paper published by industry veteran Shelley Giordano, principal of Longevity View Associates.
Giordano also serves as co-founder and chair of the Funding Longevity Task Force, a distinguished group of financial planners and academicians, who in recent years, have published a series of research articles on the effective use of reverse mortgages and home equity within a coordinated retirement income plan.
In the RMJ paper, Giordano nods to research published over the years by her peers—many of whom are Task Force members—highlighting how a reverse mortgage line of credit can be used to reduce sequence risk and enhance the overall terminal portfolio value (TPV) for retirees.
“It is hoped that this introduction will spur further papers on the synergistic potential the home asset can provide in preserving TPV and net residual wealth inclusive of home equity,” Giordano writes in the paper.
As retirees spend from their portfolios, they enter the decumulation phase, thus subjecting the portfolio to reverse dollar-cost averaging. Although considered positive during the accumulation phase, Giordano notes dollar-cost averaging contributes to wealth by allowing the investor to buy periodically at reduced rates, thus acquiring more shares—shares that compound in value over the years of the accumulation phase.
The opposite happens when clients are forced to sell assets to raise the money they need to fund spending goals.
“Assets temporarily undervalued cause the client to sell more units in order to maintain spending,” Giordano writes. “Once sold, these units are gone forever and they cannot participate in a market rebound, nor are they available for compounding within the portfolio.”
By using a reverse mortgage line of credit as a standby strategy, that is, accessing reverse mortgage loan proceeds when the retirement portfolio falls below established parameters, research has shown that retirees can employ the credit line for their spending needs in order to avoid reverse dollar-cost averaging.
“Avoiding sequence-of-return risk, and its cousin reverse dollar-cost averaging, contributes to a more secure retirement,” Giordano writes.
A growing list of academicians and financial planning professionals have already conducted valuable research in efforts to help retirement advisors open their eyes to an asset hiding in plain sight: the house.
“In doing so, probabilities are high that TPV will be enhanced and, in many cases, overall residual wealth will be greater despite having used a HECM to create liquidity from the housing asset,” Giordano writes.
To access a copy of the Retirement Management Journal, Volume 6, Issue 1, visit the Retirement Income Industry Association here.
Written by Jason Oliva