A prominent reverse mortgage researcher joined the criticism over the Consumer Financial Protection Bureau’s recent report on the products, calling the bureau “wrong.”
Wade Pfau, professor of retirement income at the American College of Financial Services in Bryn Mawr, Pa., wrote a lengthy post for Advisors Perspectives that disputes some of the CFPB’s findings. Back in August, the bureau issued a report warning against the use of Home Equity Conversion Mortgages to delay receiving Social Security payments, presenting data that showed costs outweighing the gains.
But Pfau, along with other retirement researchers, claims the bureau’s analysis was incomplete. For instance, he disputes the CFPB’s methodology of basing retirement projections on average life expectancy.
“Do not base your decisions about what happens [on] life expectancy, but rather what happens if we live well beyond life expectancy,” Pfau wrote. “Delaying Social Security is a form of insurance that supports the increasing costs associated with living a long life.”
He also posits that the CFPB should have taken into account individual borrowers’ retirement portfolios and liabilities, arguing that smart retirement planning involves figuring out which expenses need to be covered and how to cover them.
“We have to test this to see which strategy can best preserve net worth after retirement expenses are met, so that more liquidity is available later in retirement to fund a move or other expensive shock,” Pfau wrote. “The CFPB report ignores both the spending goal and the investment portfolio, so it does not provide a meaningful conclusion about what a retiree at 62 should do.”
Pfau then lays out several additional analyses using Monte Carlo simulations, which show scenarios in which using a HECM to delay Social Security payments and avoid large retirement-portfolio distributions could be beneficial to the borrower.
“Using a HECM to fund Social Security delay does not create greater risk for retirees experiencing spending shocks or needing to move later in retirement, because reduced distribution needs from the investment portfolio and the subsequent reduction in sequence risk offset the reverse-mortgage costs and preserve overall net worth,” Pfau concludes.
Read the full analysis at Advisor Perspectives.
Written by Alex Spanko