Major upcoming changes to the reverse mortgage program may have dominated industry headlines over the past week, but financial planners have continued to respond to another Home Equity Conversion Mortgage story: a Consumer Financial Protection Bureau report that warns against using the products to delay Social Security payments.
Last week, American College of Financial Services professor Jamie Hopkins took to two online news sources — Forbes and The Hill — to rebut the CFPB, which posited that the costs associated with a reverse mortgage outweigh the benefits of using a HECM line of credit to delay Social Security payments.
The strategy, popularized in recent years as a novel financial-planning use of the HECM, remains valid, according to Hopkins and others who have weighed in on the issue.
“If anything, the strategy is probably vastly underused, not over,” Hopkins wrote in Forbes, questioning why the CFPB would spend a significant amount of time criticizing a strategy that remains relatively rare in the retirement world.
The main benefit of putting off Social Security as long as possible, Hopkins claims, comes from protecting against a longer-than-expected retirement — something that the CFPB didn’t consider by basing its analysis on the average lifespan of American retirees. He also objected to the way the bureau calculated the costs of a reverse mortgage, arguing that its estimate was inflated.
Hopkins expressed similar opinions in a piece this week from Investment News, which also dove into the tax implications of using a HECM to delay Social Security. Curtis Cloke, a retirement planner in Iowa, told the publication that the CFPB didn’t think about the tax implications of taking or deferring Social Security benefits.
“Depending on the total household income, the reverse mortgage creates cash flow without tax, while the Social Security benefit could create tax,” Cloke told Investment News. “Taxes were completely ignored in this paper.”
Cloke emphasized that the strategy is more complicated than simply using the proceeds instead of Social Security payments, and recommended that borrowers establish a line of credit as soon as possible to cover a variety of potential eventualities — adding that other investment products, such as bonds or CDs, may not mature when retirees need them most. He also advised borrowers to pay back the reverse mortgage proceeds to take advantage of potential tax benefits.
“The ability to have access to a reverse mortgage line of credit while waiting for the maturity date to pay off the loan balance may actually enhance the total net worth, taxes, and optimization of the use of a reverse mortgage,” Cloke told the publication.
Read the full rebuttal to the CFPB’s analysis.
Written by Alex Spanko