Two Key Reverse Mortgage and Retirement Resources

Two recent scholarly articles take a look at how Americans don’t always make the best pre-retirement decisions — and how they can adjust their outlook to incorporate home equity and other sources of cash for a more comfortable life in their later years.

First up: “The Power of Working Longer,” a January working paper from the National Bureau of Economic Research (NBER). A team of four researchers from the Cambridge, Mass.-based organization set out to determine the relative effects of pulling different retirement levers at varying times in a worker’s life.

For instance, the team examined the effects of working longer into one’s sixties, as well as saving more over the course of one’s career — all with an eye on delaying the receipt of Social Security benefits as long as possible. The researchers found that the simple act of working one more year than planned has more of an impact than saving an additional 1% of wages over the course of a 30-year career, but that’s only part of the equation.

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“Our calculations show that working longer is only powerful if accompanied by deferring the commencement of Social Security and the annuitization of the accumulated 401(k) balance,” the group writes. A couple that works just one extra year to age 67, defers Social Security benefits, and annuitizes their defined benefit contribution balances can see an 7.75% increase in their standard of living once they retire, the researchers observe.

The findings could provide a new way of analyzing the emerging strategy of using a Home Equity Conversion Mortgage to delay receipt of Social Security benefits as long as possible in order to maximize their value. Proponents of the plan say that tapping home equity to cover expenses while waiting to maximize Social Security benefits presents a win-win for borrowers; critics, including the Consumer Financial Protection Bureau, say that the costs of originating a reverse mortgage outweigh the benefits of delaying.

The team from the NBER — which includes researchers Gila Bronshtein, Jason Scott, John B. Shoven, and Sita N. Slavov — also notes that workers who have delayed saving might have no choice but to continue working longer: The effect of increased retirement savings diminishes as time goes on and the money has less time to grow.

“Increasing retirement saving by one percentage point 10 years before retirement has the same impact on the sustainable retirement standard of living as working a single month longer,” the team notes.

The second resource, a November paper from Stanford University’s Center on Longevity, got a boost this week when it was featured on CBS MoneyWatch.

In the report, researchers Wade Pfau, Joe Tomlinson, and Steve Vernon attempt to provide a resource for financial planners working with middle-income workers. They note that in the financial advisory field, some players may be less likely to recommend certain products based on their intrinsic biases: For instance, a planner with an insurance background may be partial to annuities, while a stock-focused advisor might push workers into a mutual fund or other equity.

While some may be wary to recommend them, reverse mortgages, have “legitimate uses” in retirement, the study authors conclude.

“A reverse mortgage should be one of the tools that retirees and their advisors consider on a case-by-case basis, using analyses to quantify how financial security can be improved by strategically employing reverse mortgages,” the three researchers write.

They recommend reverse mortgages for those retirees who want to stay in their homes for an extended period; the team also cautions that potential borrowers need to have a full understanding of the costs, which “can be considerable” for HECM products.

The team also analyzed various scenarios for a 65-year-old couple with $400,000 in retirement savings, along with a home — owned free and clear — valued at $350,000. Using a standby HECM line of credit, the couple can increase their accessible wealth by up to $265,956, while using a LOC for fixed tenure payments can boost average annual income up to $9,386.

Still, the group concludes that each individual’s mileage may vary when it comes to the reverse mortgage strategy in retirement.

“We caution readers against drawing general conclusions that reverse mortgages should be used broadly,” they write. “It’s best to use reverse mortgages when the retiree plans to stay in the house for the foreseeable future and can afford the costs for maintenance, insurance, and property taxes.”

Written by Alex Spanko

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  • Did the NBER even imply that “the findings could provide a new way of analyzing the emerging strategy of using a Home Equity Conversion Mortgage to delay receipt of Social Security benefits as long as possible in order to maximize their value?” What the study looked at were sources that did not create debt and only increased the net estate of the senior. Adding a HECM to the equation not only potentially adds cash flow but also increases risk and reduces the net estate with its accrued costs.

    Like the CFPB warns about the costs of the Social Security delay strategy with a HECM, the Stanford paper emphasizes cost as Alex points out when he states: “The team also cautions that potential borrowers need to have a full understanding of the costs, which ‘can be considerable’ for HECM products” which is a forthright assessment.

    The Stanford study also correctly states that “a reverse mortgage should be one of the tools that retirees and their advisors consider on a case-by-case basis, using analyses to quantify how financial security can be improved by strategically employing reverse mortgages.” Is this not also true of the Social Security delay strategy using a HECM?

    With no other information about cash flow in the post above, the following is interesting about the Stanford paper but rather specious on its face: “…while using a LOC for fixed tenure payments can boost average annual income up to $9,386.”

    If the senior is going to have the home ANYWAY, why does the Stanford paper focus on the ability to “afford the costs for maintenance, insurance, and property taxes” when it comes to a HECM? Are they implying that those costs change? Or perhaps they are emphasizing that without a mortgage, the payment of these costs can be more easily controlled such as insurance eliminated or reduced?

  • I question whether all critics say the following: “…critics, including the Consumer Financial Protection Bureau, say that the costs of originating a reverse mortgage outweigh the benefits of delaying.” While the CFPB makes that claim, at least some point to the extension of the payback period through the increased benefits as one of the chief problems of increasing Social Security benefits by using a HECM. There are other ways to analyze this issue such as the payback period using just the increased benefits.

    The Stanford Longevity study is right when it concludes: “A reverse mortgage should be one of the tools that retirees and their advisors consider on a case-by-case basis, using analyses to quantify how financial security can be improved by strategically employing reverse mortgages….”

    It was disappointing to read the following: “…using a LOC for fixed tenure payments can boost average annual income….” (Sic). Not even tenure payouts can increase INCOME. Such payouts increase cash inflow from debt and cash inflow from that source alone.

  • I find that the growing partnership between HECM originators and financial planners is not without challenges. Among them are originators interpreting financial research findings through their HECM lens – sometime incorrectly and/or incompletely – and financial researchers misinterpreting or missing altogether key aspects of the increasingly complex HECM program.

    Certainly not a reason to abandon the partnership, but we each need to be cognizant of our respective areas of expertise and rely on our “partner” from the other arena where appropriate.

    • REVGUYJIM,

      Please provide one or two examples of the differences in interpretation of research findings you discuss. Also it is important that we understand what key aspects of HECMs we are seeing being missed and also misinterpreted.

      There is a huge gap between industry training and what is actually needed to successfully (in the long term) be the cash flow specialists for financial advisors. It seems you are in part touching on that.

      For example, this is prime time to be meeting with financial advisors and demonstrating how HECMs can help offset loss due to the risk in the sequence of returns with over 2% losses (3:50 PM EST) in the DJI and the S&P 500.

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