There is a countless number of investment strategies retirees can use to plan for their financial future, but one method that has often been considered a last resort option may offer a “surprising” solution to retirement income planning, suggests a recent article from TIME Money.
“Despite a bad reputation, reverse mortgages, which let retirees tap their equity they have built up in their home, have become a better deal in recent years,” states the article written by TIME’s Penelope Wang, who points to the new book from Wade Pfau, director of retirement research at McLean Asset Management in McLean, Va.
Released earlier this month, Pfau’s book, “Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement,” serves as a guidebook on how home equity, through the use of a reverse mortgage, can be used to support a person’s financial plan for retirement.
“Used strategically, a reverse mortgage can greatly improve the sustainability of your retirement income,” Pfau is quoted as saying in the TIME Money article.
Although program changes have added greater consumer protections in recent years, including new policies for non-borrowing spouses and the implementation of the Financial Assessment, reverse mortgages are still not a one-size-fits-all solution to retirement planning.
Reverse mortgages can, however, provide flexibility for borrowers by allowing them to choose from different payout options based on their particular needs, and can also be used as a strategic “cushion” against market volatility.
“Reverse mortgage loans help cushion market risk, and they reduce the need for investment portfolio withdrawals,” Pfau says in the article.
Another option that plays into the flexibility of these loans is that borrowers have the choice to take out a line of credit, which if taken early in retirement—even if there is not an immediate need for cash flow—can be a “smart strategy” since the line of credit grows over time, thus giving borrowers the potential for more resources to tap later in life.
“Reverse mortgages may be a niche market right now, but it’s like the early days of figuring out Social Security claiming strategies,” Pfau says. “As people realize the need, the information will become much more available.”
Read the full TIME Money article here.
Written by Jason Oliva