As more individuals are shouldering the responsibility associated with planning for retirement — particularly as programs like employee pensions become less and less common — those planning for retirement can be well-suited to look at alternative financing options, including reverse mortgages. This is according to a recently-published report by the Society of Actuaries (SOA).
“Recent history has seen not only economic uncertainty and volatility but also an increased emphasis on individuals taking responsibility for securing their financial well-being in retirement,” SOA writes in its study. “As a result, today’s retirees may be exposed to a variety of post-retirement risks that can affect them both as individuals and as members of society. In view of this, the Society of Actuaries (SOA) continues to work to raise awareness of post-retirement challenges and to explore ways to help people become aware and address them.”
To bring more awareness to the continuous issues affecting retirement stability, SOA published its 2020 Retirement Risk Chart. A project that began in 2003, the chart is designed to detail risks faced in retirement in plain, easily-understood language. Some of the risks the chart highlights include longevity, investments, health, fraud and loss of loved ones, as well as offering strategies that might be used to manage risks in retirement to have a full picture of what would be involved in planning, and some of the natural trade-offs that some plans may have over others.
One of these possible strategies involved the use of a reverse mortgage product. As home equity is often an overlooked asset for those in retirement — even though the home is, for most, a senior’s biggest asset — a reverse mortgage can provide a viable opportunity for seniors to employ their home’s equity in order to stabilize their financial resources in retirement.
“Retired individuals with outstanding mortgages can effectively improve their monthly cash flow by replacing their conventional mortgage with a reverse mortgage, using the lump sum proceeds of the reverse mortgage to pay off the conventional mortgage,” the study reads. “Or, if the conventional mortgage has only a few years left, a better strategy might be to pay off that loan and not take on additional mortgage debt. Fees and terms of reverse mortgages need careful evaluation.”
The report also offers the idea of using a reverse mortgage to create a regular stream of retirement “income,” depending on the option chosen for accessing the loan’s proceeds. SOA also offers a comparison between annuities and reverse mortgages.
“When interest rates are higher, the retiree will receive higher monthly lifetime payments when buying a fixed annuity, while a reverse mortgage purchased when rates are higher will result in lower monthly payments,” the report reads. “Some experts suggest strategies that combine reverse mortgages with other investments to provide retirement income.”
Read the report at SOA.