Actuaries Tout Reverse Mortgages to Allay Post-Retirement Risk

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.

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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.

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  • (Chris, thanks for pointing out this report.)

    While reverse mortgages were mentioned, the report did not dwell on them. While the authors called reverse mortgage proceeds retirement income as Chris points out, they emphasized the cash flow aspects of those same proceeds. They never gave the impression that they thought of reverse mortgages as loans of last resort or primarily for the house rich but cash poor.

    The focus of the report was identifying risks that most retirees encounter and then briefly providing ideas on how to manage those risks. While the report compared annuities with reverse mortgages, the report failed to point out some of the most important areas of difference such as 1) the financial risk associated with an annuity as an investment with much of its risk front loaded while many HECMs have lower financial risk to borrowers in the early years which normally grows with time or 2) income taxation on the two and, yes, reverse mortgages may produce tax problems for borrowers (but not heirs IF the borrower(s) is deceased. (The tax issue at termination is not nearly the potential problem for HECM borrowers that it can be for proprietary reverse mortgage borrowers.)

    While not the recommendation of reverse mortgages most of us believe the actuaries should have presented, nonetheless it was much better than anything I would have expected.

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