Forbes: Reverse Mortgages, ‘Buffer Assets’ Can Assist Retirees in Volatile Market

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.”

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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.

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  • “[‘Buffer assets’] are assets available outside the financial portfolio to draw from after a market downturn…. 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.”
    The article also states: “Using ‘buffer assets,’ like a reverse mortgage….”

    If “[buffer assets] are assets,” why is a reverse mortgage referred to as a buffer asset? The purpose of a reverse mortgage is not “to support spending WHEN THE PORTFOLIO IS OTHERWISE DOWN.” The purpose of a reverse mortgage is to provide liquidity to eligible homeowners in retirement, period.

    To a borrower, a reverse mortgage is a mortgage (otherwise known as a debt). It is only an asset to a lender or to whomever a reverse mortgage is sold. So how can a reverse mortgage be an asset to a borrower?

    The problem is many people see the reverse mortgage line of credit as an asset. It is not an asset. It is simply a notion to a borrower as to how much additional loan proceeds a borrower can obtain at any point in time. A borrower does not “own” the proceeds, until the borrower requests them and receives them from the lender; however, the lender is not obliged to provide those proceeds if 1) the payout would cause the unpaid principal balance to exceed the Maximum Principal Amount (or MPA, also known as the Maximum Mortgage Amount, or MMA), or 2) the reverse mortgage is in a default that requires that no payouts be made until the default is cured.

    It is statements like those in the quotations that confuse not only prospects but their financial advisers as well. While I agree that as to the owner, a life insurance policy with a cash value is an asset, a reverse mortgage originated by that same owner is a mortgage, or debt. It is also important to remember that not all reverse mortgages have lines of credit; only adjustable rate reverse mortgages have lines of credit.

    What is clear from the article is that CASH or cash equivalents (whose source is outside of the portfolio) are buffers assets against a downturn in the markets. It seems the author wants to somehow equate the cash value in a whole life insurance policy with the notion in a reverse mortgage line of credit. While there are similarities, life insurance is an asset to the owner and reverse mortgages a liability against collateral owned by the borrower.

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