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Reverse Mortgage Credit Line Strategy May Benefit More Retirees

The reverse mortgage line of credit strategy may have concrete retirement benefits for a wider array of consumers than previously thought.

Previous research into the Home Equity Conversion Mortgage line of credit option had focused primarily on people who had twice as much retirement savings as their home values, according to researchers Peter Neuwirth, Barry Sacks, and Stephen Sacks. Curious about how HECMs might allow other types of retirees to maintain cash flow throughout their golden years, the team decided to analyze strategies for multiple types of retirees, including the “mass affluent” and the “almost-affluent.”

Their results, including their “rule of 30” for retirement cashflow, were published in this month’s Journal of Financial Planning.

Within these categories, the researchers examined different proportions of home wealth and retirement assets: For instance, a regular “almost-affluent” person had a home worth $150,000 and savings of $300,000 at the start of retirement, while a “house-rich, almost-affluent” person had house worth $300,000 and savings of $150,000.

The team then ran two types of retirement projections for the different kinds of retirees: One in which they set up a standby reverse mortgage line of credit at the outset of retirement and used the proceeds during down markets, and one in which they drew down their portfolio entirely before taking out a HECM.

The results had two clear takeaways: The first strategy routinely outperforms the second for all types of retirees studied, resulting in significantly higher probability of a person’s cash lasting for the duration of a 30-year retirement. For instance, someone with an $800,000 house and $400,000 in savings would have a 90% chance of maintaining steady cash flow for 30 years; that number would drop below 30% for the second strategy.

The spreads aren’t that stark for all of the scenarios — for instance, the “almost-affluent” retiree would have a 90% or 80% chance of steady cash under either scenario — but the first strategy comes out on top each time.

In addition, the researchers found that using the first strategy results in a steady 90% chance of retirement success for a wide variety of home-to-savings ratios. In each of these scenarios, the initial distribution ended up being one-thirtieth of the total retirement income — resulting in the “rule of 30.”

This would compare favorably to the standard “four-percent rule,” which stipulates that retirees should only withdraw 4% of their entire account each year. For instance, under the 4% rule, that almost affluent retiree would be drawing $12,000 per year; under the rule of 30, he or she could net $15,000 per year, the team found.

“A simple rule of 30 can be used by a broad range of retirees to help determine how much retirement income their total retirement resources can provide, with a small probability of outliving those resources,” the researchers wrote. “The availability of this rule can potentially make retirement income planning more straightforward for a large number of individuals currently considering their future retirement income needs.”

“As a result, establishing a HECM line of credit as early as possible can provide the almost-affluent retiree — particularly if he or she is house rich and cash poor — with a significantly higher retirement income than a later establishment of the credit line, while reducing the probability of exhausting his or her assets,” the researchers conclude.

Written by Alex Spanko