There are four “overhyped” investment strategies that retirees should avoid when trying to determine how to make ends meet in retirement, and among equity-indexed annuities, non-traded real estate investment trusts (REITs) and cash-value life insurance, reverse mortgages should be considered among the last options. This is according to Liz Weston, a certified financial planner and columnist at NerdWallet in a piece at Nasdaq.com.
“[I]nvestments that are enthusiastically pushed by commission-earning salespeople may not be the best for your financial health,” Weston writes. “Before you buy any of the following, you’d be smart to investigate lower-cost alternatives and to consult an objective, knowledgeable third party, such as a fee-only financial planner.”
Reverse mortgages allow for seniors to convert the equity they’ve built up in their homes to cash, but come with an asterisk that borrowers don’t always seem to realize, Weston says.
“[B]orrowers don’t always realize that their debt is accruing monthly interest,” she says. The amount owed on the loan may grow to the point of consuming any remaining equity, Weston writes, citing a conversation with AARP Foundation attorney Barbara Jones.
“Reverse mortgages typically aren’t a good fit for people who may need to rely on their equity for future expenses, such as medical bills or nursing home care,” Weston writes. “Reverse mortgages could be a way to avoid foreclosure if a homeowner can’t afford to make payments on a regular mortgage.”
There may be no equity left for their heirs, “but at least the person gets to age in place,” Jones tells Weston.
In contrast, a new research working paper released by the Boston College Center for Retirement Research reveals not only that the majority of seniors’ preferences is to remain in their homes as they age, but that a majority of homeowners experience enough residential stability to tap home equity through either reverse mortgages or property tax deferrals.
“The overall conclusion is that most homeowners experience enough residential stability to tap home equity through products and programs like reverse mortgages and property tax deferrals,” the paper concludes.
Read Weston’s article at Nasdaq.com.