At first he started to think of reverse mortgages as a tool of last resort for retirees, but Steve Vernon, FSA and consulting research scholar in the financial security division at Stanford University’s Center on Longevity, began to come around on them as a viable way for people to avoid sequence of returns risk when he absorbed the work of other retirement researchers, particularly Dr. Wade Pfau.
“I thought they perhaps had a place there,” he tells RMD in a phone interview. But when the Department of Housing and Urban Development changed the upfront costs of mortgage insurance on reverse mortgage products, Vernon found himself back where he started in thinking of them as a tool of last resort, as he told RMD in a November 2018 interview.
The difference between Vernon and many other financial scholars, though, is that he is far more pragmatic than others in similar positions can be in viewing reverse mortgages as viable financial tools for seniors that find themselves in particular situations, and says as much in his book “Retirement Game-Changers: Strategies for a Healthy, Financially Secure, and Fulfilling Long Life.”
“I don’t [want] to dismiss them out of hand,” he says. “I know people in California who are cash-poor and house-rich. Its high costs are your price that you’re paying to fund your retirement and stay in the house, and if that’s an acceptable price, then pay it.”
Perception versus reality
When assisting some personal acquaintances in navigating how to effectively tap their home equity, Vernon noticed that some of his friends – an older couple – were generally averse to the idea of using a reverse mortgage.
“They had very negative perceptions of reverse mortgages,” he says. “And I told them that it’s not the case that you give the deed to your house over to the lending company.”
Though the couple ultimately decided to downsize their home instead of getting a reverse mortgage, Vernon explains that the reason behind that had to do with more than just financial concerns. They lived in an area that was prone to fires, and chose to relocate to an area that was less dangerous in that regard. Still, after he explained how a reverse mortgage could be properly used to fund their retirement, it was an option that was considered after he helped to dispel some of the myths surrounding them.
“At least they explored the reverse mortgage as one tool, and it could’ve worked from a pure financial perspective but they had other reasons to move,” he says. “There are circumstances where I do think it’s a tool that can work, I just think people ought to go into it with their eyes open. That’s really all I’m advocating.”
Vernon’s acknowledgment that reverse mortgage products can work at all represents a pragmatic viewpoint that can seem difficult to find when looking at wider conversations about reverse mortgage products among financial advisors and academics, and Vernon himself knows this.
“I do want to educate people to dispel the myths that are out there, and then just consider the real factors [about] whether it will work for you or not,” he says. “There are people who dismiss them out of hand, and then there are people who think they’re the greatest thing since sliced bread. For me, it’s in-between those two.”
Helping clients think it through
While he was reticent to comment on the specifics of a financial advisor’s fiduciary duty, Vernon does believe that advisors have a duty to their clients in laying out all the viable financial tools they can in order to help their clients make ends meet. Those tools include reverse mortgages.
“I would say [advisors] should be discussing all the tools that are open to the client, just as a trusted advisor, and giving them the pros and cons,” Vernon says. “I think a financial advisor is in a position to be that person who just helps the clients think through what might work for them. I see the numbers, and you have lots of people approaching their retirement years with inadequate savings, and many of them have more wealth in their home than in their 401K.”
In his capacity as a financial scholar and author on the topic of retirement planning, Vernon conducts workshops for retirees that lay out four pillars for those who may not have adequate savings: work longer, reduce spending, explore using home equity, and make the best decisions for what resources are available.
At the end of the day, it comes down to how best those with inadequate retirement savings can best be served. Reverse mortgages, Vernon says, should not be overlooked if they can help someone achieve their retirement goals.
“There are a lot of people in a jam. A lot of older people who would like to retire, but don’t have the savings for it,” he says. “I think that advisors should be open to any kind of lever that can improve [their client’s] situation.”