USA Today Analyzes Reverse Mortgage Social Security Strategy

USA Today recently chatted with some financial planners for their takes on the Consumer Financial Protection Bureau’s recommendation against using the reverse mortgage to delay Social Security benefits — and some attempted to poke holes in the CFPB’s analysis.

The federal bureau last month released a report suggesting that the costs of a reverse mortgage could end up outweighing the potential benefits gleaned from the strategy, in which the borrower uses the loan proceeds to cover expenses while waiting to claim the highest Social Security benefits at age 70.

Multiple sources objected to this argument, with USA Today joining Jamie Hopkins and Jack Guttentag in laying out scenarios where the strategy could work.

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“Experts took issue with the report’s methodology and assumptions, which might cause homeowners to unnecessarily dismiss reverse mortgages as a retirement-income tool worth considering,” financial columnist Robert Powell wrote.

Powell, who also serves as editor of Retirement Weekly, spoke with certified financial planner Marguerita Cheng, who said Home Equity Conversion Mortgages could be a good Social Security-delaying strategy for widows, widowers, or divorcees. Because they don’t benefit from their spouse’s income or Social Security benefits, Cheng said, a reverse mortgage could help bridge those gaps.

Both Cheng and John Salter, an associate professor at Texas Tech, told USA Today that there are risks associated with reverse mortgages. But both cautioned that a savvy borrower should consider multiple possibilities and not simply dismiss one out of hand.

“Future debt is a risk, but the risk has to be weighed with the reward of what is being created,” Salter told the paper. “There are no free lunches. But we should always have a comprehensive toolbox of strategies, and we must find the right tool for each person.”

For instance, Cheng suggested that homeowners should only consider taking out a reverse mortgage if they can see themselves comfortably aging in place at that specific property — and to perhaps avoid them if the home could be too costly or impractical to maintain over time.

Read the full piece at USA Today.

Written by Alex Spanko

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  • At least one of the financial advisers above stated a few years ago that he would release an article demonstrating the validity of this strategy. To date that article does not exist.

    Most of the arguments for this strategy differ little from those used years ago to justify obtaining a deferred annuity with HECM proceeds. Do we want to be found still recommending this strategy knowing this strategy is riskier than most deferred annuities with sufficient riders and with the CFPB opposing it?

    Not one of these advisers has yet addressed the payback period. The analysis that even if a 62 year old outlives life expectancy, how many years will they experience the reward this strategy offers? For example if life expectancy is 85 and the payback period is through age 84, the reward is for just one year. Not every senior who lives past 85 will reach age 90 and maybe 20% of those who are projected to outlive their life expectancy will reach age 100.

    For example, if the senior will receive $1,000 per month if they start at age 62 and happen to live to 88, is the additional $40,000 in the future (future value of that reward) worth the risk of loss up until age 84 when the payback period ends? At age 70, the amount at risk is over $120,000 but reduces over time until age 84 in most cases. The examples will change after October 1, 2017.

    Some want to argue COLA increases and income tax. Most of those familiar with this kind of analysis generally leave out these parts of pieces of the puzzle due to their speculative nature. Most conservative Social Security planners assume that COLA increases will be offset by income taxes.

    Because we refuse to provide any meaningful warnings on the risk of this strategy as to the vast majority of seniors, the CFPB has every right to provide that warning even if we disagree with their analysis. We attack the CFPB for not providing sufficient examples but where do we provide them? Yes, life expectancy only covers half of the seniors BUT how many will live much past that age??? Most will pass away closer to 85 than even 95.

    There are special cases where this strategy is warranted and should be used. Perhaps one way of dealing with this issue is by requiring seniors who desire a HECM before Social Security full retirement age to obtain a statement from a party who has by law or contractual requirement, a fiduciary responsibility for the work product agreeing with the decision to obtain a HECM. This would take the issue of the undue influence of an inherently biased originator out of the picture. Rules would have to be in place regarding related parties and other issues.

  • The CFPB warning may have been needed. If we are selling the HECM product as a means of delaying Social Security, we need to work with financial planners to consider the advantages for each client. However, many retirees will file early because they don’t understand the advantages of waiting, and this is where the CFPB has done the most damage.

    Yet, there are points that continue to be missed in the Social Security debate:
    1. The CFPB, and others, erroneously assume that retirees are filing early because they need $1,369 more each month. That is simply not true. Many will file early because they have a small monthly budget deficit. The costs of a $100 monthly draw from home equity are quite different than the costs of a $1,369 monthly draw.
    2. If a strategy costs more on average, the CFPB assumes the strategy lacks merit. However, insurance is designed to cost more, on average, than the benefit it provides. The HECM product is no different. It can be used as a form of insurance that provides future security if we outlive our life expectancy. We don’t buy insurance to protect us from “average”; we buy it to protect against extremes.

    • Dan,

      I live in California and believe those who buy earthquake insurance are penny wise but pound foolish. The coverage is out of proportion to its cost and the deductibles are ridiculous. Most in California agree with that assessment. In fact, lenders do not generally require it.

      Just because it is available does not mean it is a good buy. One has to weigh the situation to see what is needed and what is not. So my advice to seniors is not to listen to friends, neighbors, or even someone as experienced as me but rather to speak to their financial adviser about their future cash flow needs and see if a reserve of their approximate net principal limit could help them meet their current and future cash flow needs.

      Last week I got a letter from the IRS warning me that if I did not file a tax return for 2016, I could lose my ability to access Obamacare. I laughed since I have been under Medicare with a supplemental insurance policy for about four years now. My wife is also under Medicare. Their threat was more relief than threat since we do not have to deal with Obamacare. I am sure younger couples may not feel the same if they received such a notice. What is strange is with an extension, my tax return is not due for another 19 days or so. The warning from the IRS proves that not all noise about the need of insurance is sage advice.

  • Look, l like to keep it simple for the consumer, The real issue is the consumer must determine if a reverse mortgage is suitable for their circumstances and if the idea of a reverse mortgage to delay taking social security is a feature that is beneficial to their financial strategy. Remember the entire time the reverse mortgage exists increases debt and decreases equity. The “theory” being talked about here is just an idea with no statistics of consumers who it benefited or harmed.

    • Sandy,

      Ultimately you are right. Few, if anyone, disagree with you BUT in order to reach that conclusion a senior should have proper, adequate, and competent advice. While they could call the Social Security Administration and ask questions, does anyone really believe they would walk away with a means to analyze their situation to the degree needed? If so, I have a toll road idea for the Los Angeles Harbor that I am willing to negotiate the sale of.

      The analysis is not simple. First the delay of benefits to be received between 62 and full retirement age is much riskier than those to be received after full retirement age but before 70. Then there is the risk of death between 62 and the age at which their foregone benefits are fully recovered through the benefits that exceed what they would have received at 62 net of income taxes on the benefits.

      But here’s the rub. The reasoning behind obtaining the HECM for the sole purpose of deferring Social Security benefits is very, very similar to that for using HECM proceeds to buy a deferred annuity. The difference is today’s deferred annuity has riders that make them less risky with fewer penalties. There are NO riders with the HECM Social Security delay strategy.

      All but the few seniors who understand the risks, the potential reward, if any, the health issues that need to weighed, marital considerations of posthumous benefits from the death of a spouse under the Social Security benefit rules, life expectancy, and various other criteria need the help of a financial adviser who is not only unbiased and competent in such matters but also has a fiduciary standard of duty should help in the analysis it will take to see if this strategy is right for the senior.

      This strategy has some of the greatest risks of any financial strategy out there plus the additional costs of interest, ongoing MIP, and upfront costs. When only the rewards are presented it seems far better than it is.

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