Because of the additional volatility introduced into the stock market by the outbreak of the COVID-19 coronavirus, retirees may have questions about what constitutes safe and sustainable tapping of their assets, accounts and investments to safely make it through the affected period. Changes to the interest rate environment have also made the traditional “4% rule” less relevant in the current climate.
Using “buffer assets,” like a reverse mortgage, can help retirees create more sustainable spending patterns that help to take modern economic realities into account. This is according to Dr. Wade Pfau, professor of retirement income at the American College of Financial Services and principal at McLean Asset Management.
“[‘Buffer assets’] are assets available outside the financial portfolio to draw from after a market downturn,” Pfau explains. “Returns on these assets should not be correlated with the financial portfolio, since the purpose of these buffer assets is to support spending when the portfolio is otherwise down.”
There are two primary types of buffer assets that retirees can take advantage of if the market takes something of a turn, Pfau explains. This is where a reverse mortgage can come into play for a senior.
“The two main buffer assets are to use policy loans with the cash value of whole life insurance (though this would have to have been set up years in advance), or to open a line of credit with a reverse mortgage,” he says. “By helping to reduce the need to take distributions from the portfolio when it is in trouble, buffer assets can support a higher spending rate with the same level of sustainability.”
Things may look far less positive for those expecting to or in the process of entering retirement, but Pfau aims to assure people in such situations that there are viable paths forward as the country endures this latest economic turbulence.
“[T]hings look bleak, but there is a path forward,” he says. “By incorporating partial annuity use, having access to a buffer asset, and having some capacity to reduce spending, a reasonable withdrawal rate can still be possible and can provide some relief to those approaching retirement at this unprecedented time.”
Read the column at Forbes.