The reverse mortgage line of credit can be a major tool for those at or near retirement to weather the economic shock of the COVID-19 coronavirus pandemic, particularly because sequence of returns risk amplifies investment volatility. If a retiree has a reverse mortgage in place to draw from while the market remains volatile, then they stand a better chance of weathering the storm caused by the current crisis.
This is according to Dr. Wade Pfau, professor of retirement income at the American College of Financial Services and founder of RetirementResearcher.com, in the latest episode of The RMD Podcast.
In terms of the elements that have caused the most material impact on a person’s ability to adequately fund their retirement, it centers on two factors: low interest rates and market volatility, he says.
“[The biggest impact on retirement] is kind of a combination of two factors, and the one that’s been ongoing is the low interest rate environment and how lower interest rates really make retirement more expensive to fund,” Pfau says. “And then, of course, with the market volatility in the market downturns, that can affect people’s ability to really sustain the same lifestyle. They may have anticipated that their portfolios [would be] significantly larger than they might be today, depending on how their asset allocation and everything played out.”
Because of a reverse mortgage line of credit, having the ability to draw on that instead of investments during a period of market volatility can likely make a major difference in the financial health of a retiree during and after the current crisis, Pfau says.
“Even if the overall market recovers, a retiree spending from their portfolio might not get to enjoy that recovery,” Pfau says. “And that sequence of returns risk amplifies the impact of investment volatility. So, that’s where a reverse mortgage can fit into this in a number of different ways to help alleviate that risk on the investment portfolio.”
The growing line of credit can act as a buffer between the retiree and the economic volatility, whether through refinancing an existing mortgage or even in reducing fixed expenses in early retirement, he says.
“[Y]ou get a source of spending so that you don’t have to use as high a distribution rate from your investment portfolio,” he says. “In particular during today’s environment, helping to leave the portfolio alone and not spend from it after a market downturn and sourcing that spending from the reverse mortgage line of credit can really help to preserve the investment portfolio, and to create long-term positive impact net as a piece of a reverse mortgage.”
Dr. Pfau also discusses the receptivity of financial planners for reverse mortgages during the current crisis, his “origin story” in terms of what convinced him of the viability of the products, as well as how the pandemic is affecting his own day-to-day operations.
Listen to the new episode of The RMD Podcast for the full discussion.