In a post from reverse mortgage expert Jack Guttentag, the Huffington Post explores an interesting twist to a potential Home Equity Conversion Mortgage borrower’s mental calculus — the knowledge that people in his family tend not to live very long.
The bulk of Guttentag’s piece explores the typical options available to a 61-year-old retiree who wants to relocate to a warmer climate. While the man has enough cash to cover the price of the home and has two pensions, Guttentag, a professor of finance emeritus at the Wharton School, walks through the various ways he could use a HECM to supplement the transaction or his future retirement plans, eventually rejecting a HECM for purchase; because his cash generates little interest income, Guttentag recommends using it to buy the house instead of saving. In order to supplement the couple’s income while deferring Social Security as long as possible, he advises that they take out a reverse mortgage line of credit or receive fixed HECM payments until age 70.
It’s only at this point that the retiree drops a bomb: People in both his and his wife’s family tend not to live very long, and neither one expects to live much past age 78. Though it’s a decidedly morbid thought, life expectancy plays a major part in how people should plan for their retirement years, and Guttentag notes that it changed his entire strategy for the man.
“For one thing, it upended the decision on when to take Social Security,” Guttentag wrote. The option of taking fixed payments until age 70 no longer made sense, since the extra income gained at that age would not make up for the eight years of deferred cash if the man and his wife didn’t think they’d see their 80s or 90s.
“Hence, I retracted my recommendation for using a HECM to provide a temporary income supplement, since the purpose of the supplement was to enable the senior to delay taking Social Security,” Guttentag said.
He still advised the potential borrower to take out a line of credit, even though a shorter life expectancy likely means that the couple could live off of the man’s pensions without ever needing to tap into the HECM: “No retiree wants to live with even a small risk that they can become impoverished by living too long,” Guttentag wrote, noting that a small loan balance deduction from the estate represents the only potential downside. “The HECM credit line is insurance against that cost.”
Read Guttentag’s full breakdown here.
Written by Alex Spanko