Why Financial Advisors Must Accept Reverse Mortgages in Retirement Planning

The negative perception surrounding reverse mortgages not only stunts the growth potential for these products to reach a wider consumer audience, but also deters financial planners from recommending the use of home equity for retirement income planning.

“In short, well-handled reverse mortgages have suffered from the bad press surrounding irresponsible reverse mortgages for too long,” writes Wade Pfau, professor of retirement income at The American College and director of retirement research at McLean Asset Management, in his new book, an excerpt of which appeared in Investment News this week.

Pfau’s book, “Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement,” hit shelves last month and has been generating considerable press in various financial planning news outlets, including Investment News and TIME Money.


Although the media begun to acknowledge the improvements that have taken place for reverse mortgages in recent years, the trend of positive coverage is still a new phenomenon.

And with so much pre-existing bias against these products, Pfau says it can be hard to view reverse mortgages objectively without a clear understanding of how the benefits exceed the costs.

“Reverse mortgages give responsible retirees the option to create liquidity from an otherwise illiquid asset, which can, in turn, potentially support a more efficient retirement income strategy,” he writes book.

At the crux of the book is the concept that retirees must support a variety of expenses if they want to enjoy a successful retirement. So while retirees will have to manage overall lifestyle spending, as well as account for unexpected contingencies and their legacy goals, they will have to look beyond traditional funding sources like Social Security and pensions.

But suppose retirees have two other assets such as an investment portfolio and home equity. The task then, according to Pfau, is to link these assets to spending obligations efficiently while also mitigating retirement risks like longevity market volatility and spending surprises that can impact the person’s plan.

“The fundamental question is this: How can these two assets work to meet spending goals while simultaneously preserving remaining assets to cover contingencies and support a legacy?” he asks.

Since spending from either asset (an investment portfolio and home equity) today means less will be available for future spending, the dilemma becomes how a retiree can best coordinate the use of these two assets to both meet spending goals and still preserve as much legacy as possible.

A reverse mortgage can be one viable option, Pfau notes, but this product is typically only considered as a last resort once the investment portfolio has been depleted.

“The research of the last few years has generally found this conventional wisdom constraining and counterproductive,” he writes. “Initiating the reverse mortgage earlier and coordinating spending from home equity throughout retirement can help meet spending goals while also providing a larger legacy.”

This, he says, is the nature of retirement income efficiency: “using assets in a way that allows for more spending and/or more legacy.”

Read more from Pfau’s book in this excerpt published by Investment News here.

Written by Jason Oliva

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  • Hoping to find arguments as to why the title of this blog is true (“Why Financial Advisors Must Accept Reverse Mortgages in Retirement Planning”), it was disappointing to read a strong case for reverse mortgages but no compelling reason as to why reverse mortgages must be accepted in retirement planning because in fact they do not have to be. Those who argue otherwise have little in the way of support.

    The reverse mortgage industry should find much stronger support in the financial services industry than it does. Reverse mortgages should be used with sufficient frequency in retirement planning that not reviewing its use with retirement planning clients should be considered a less than preferred practice verging on malpractice.

    Going around and claiming that the DOL fiduciary standard requires the review of reverse mortgages in providing retirement planning services is troubling since there is no such requirement. The DOL oversees assets that are held in employee benefit plans and all IRAs. A reverse mortgage is debt to participants and beneficiaries. The principal residence of the borrower is the only asset of the borrower that can serve as collateral and principal residences are not within the oversight of DOL since title to these homes cannot be held in an employee benefit trust or in an IRA.

  • If you haven’t read Dr. Pfau’s book, you should. It is a “must read” for anyone in the industry or considering the use of a reverse mortgage. Perhaps even more so for anyone who to this point has dismissed the use of a reverse mortgage due to the negative bias cited.

  • Why do financial advisors have to accept a very expensive limited financial debt for people in retirement?? Yes, it will work for a few, but never the majority in its current form. There is a reason the majority of advisors see the reverse mortgage as a last resort and why we are seeing the endorsements where they are.

    • Can you share with us your view of “the reason the majority of advisors see the reverse mortgage as a last resort”?

      My experience with advisors has been, almost without exception, that “the reason” is they don’t understand the program. Once they do and that “reason” is eliminated, the second “reason” is their clients’ negative reaction to the mere mention of a reverse in the context of their retirement planning. Few advisors are willing to fight the battle to overcome the clients’ negative bias born of ignorance (not in the pejorative sense!) and the conversation ends there.

      • 15 years of personal experience. Maybe others have a different view/experience. I think you answered the question yourself. The amount of time and energy it takes to change the ‘loan of last resort perception’ of advisors never made it worth it for the business it would yield. How much time does it take to sit down with 50 financial advisors? What percentage of them will generate a lead? How many leads will turn to loans? When you start tracking this you know its a long road. It didn’t help that FINRA used to label this product as a last resort and advised against it. Unfortunately you only get paid in this business if you get loans. As you pointed out educating financial advisors is an uphill battle because you have to have them sell there clients with no financial benefit to the advisor. That is not how financial advisors work. Maybe in 5-10 years this avenue will work better due to perception, but that’s a long time to wait for a paycheck.

      • Jim and REVGUYJIM,

        I agree with both of you.

        My argument is that an introduction from the financial advisor is very helpful but if the client is against it, why would the financial advisor push the client? Financial advisors are not about to lose clients because they do not even want the subject of reverse mortgages brought up.

        A CFP in Tulsa told me that she does not believe that her client base wants her encouraging the use of reverse mortgages based on client meeting reactions. She believes that working with the financial advisors of millennials is our best bet and then added that most of those advisors are just now getting their degrees. She is not only active in her local FPA chapter but also the Oklahoma state chapter and has not found much support for reverse mortgages at either level.

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