One of the most pronounced deficiencies of existing retirement programs is that instead of integrating three core features — including asset management, annuities and a Home Equity Conversion Mortgage (HECM) — these are all components which are considered separately. Integrating them into a single, efficient retirement plan could be very beneficial for a retiree, according to Jack Guttentag — aka the “Mortgage Professor” — in a new column at Forbes.
“The potential synergies vary with the characteristics of the retiree,” Guttentag writes. “Those whose wealth is largely or entirely in their home do best by taking a HECM reverse mortgage credit line, using part of it to purchase a deferred annuity, with the balance drawn on monthly during the deferment period.”
When it comes specifically to retirees who want to incorporate their home’s equity into a retirement plan, different options for using a HECM can sometimes make the choice with the best potential yield difficult to determine, Guttentag writes. These options can be characterized in three ways.
The first is the “credit line backup option,” for a retiree with a high risk/high asset portfolio, Guttentag explains.
“In the event that actual asset returns exceed the median return used in the retirement plan, both financial assets and the HECM credit line will grow,” he says. “(The line grows at the HECM mortgage rate). Excess credit line and/or financial assets can be used to increase spendable fund draws, to purchase additional annuities, or left in the estate.”
The second is the “term payment option,” spelling different potential impacts than other proceed disbursement options available through a HECM loan.
“In contrast to the other HECM options where the retiree has discretion to draw funds or not draw funds, the term payment option fixes the monthly payment for a period equal to the annuity deferment period,” he says. “This may be an attractive option for retirees who want the discipline of a fixed HECM payment during the annuity deferment period, while minimizing the need for future plan adjustments.”
The term payment option would free up financial assets to potentially purchase a larger annuity, he says.
The final option is “the credit line/all-in option,” most helpful for those retirees with no financial assets to speak of, Guttentag says.
“The retiree takes a credit line, part of which is used to purchase a deferred annuity while the remainder is used as a fund source during the deferment period,” he explains. “When the retiree has financial assets, a wider range of possibilities opens up because there are now two sources of funds that can be used at different times.”
While there may be an initial “side-eye” look from insurance professionals at these options as it relates to the purchase of an annuity, these concerns tend to fade away when looking more closely at the details, Guttentag says.
“Note that many insurance carriers (and state insurance regulators) look askance at an annuity that has been funded by a reverse mortgage,” he says. “In the case at hand, however, the retirees who fund annuities with a credit line have sufficient assets for that purpose but have elected not to use it. Retaining the assets strengthens their financial status, eliminating any cause for regulatory concern.”
Read the column at Forbes.