An article on “Standby” reverse mortgage use as a retirement strategy was published this week in the Journal of Financial Planning. The article, based on research done at Texas Tech University, considers a Saver reverse mortgage as a risk management tool for retirement saving.
The Home Equity Conversion Mortgage (HECM) Saver, used as a “standby” reverse mortgage, the research states, increased retirement portfolio survival rates significantly. With Saver benefits spanning a lower cost, non-cancellable line of credit, borrower control over when and if the credit line is used and the ability to repay the loan at any time without penalty, the loan offers “unique and attractive features,” the authors, including Dr. John Salter and Harold Evensky write.
“We find this risk management strategy improves portfolio survival rates by a significant amount. The improvement in survival rates is attributable to the mitigation of the volatility drain—the risk of having to sell investments when depreciated,” the research states.
The Saver strategy was used in 1,000 simulations testing its efficacy as a retirement savings strategy, using the credit line against a cash reserve bucket under different withdrawal and debt preference scenarios.
“The main conclusion of this study is that HECM Saver reverse mortgages do have a place in mainstream retirement distribution planning, and have a significant impact on the probability that some clients will be able to meet their predetermined retirement goals,” the authors write. “Updating plans during prolonged bear markets or severe market drops, along with this strategy, has the possibility of further increasing this chance of success.”
Written by Elizabeth Ecker