Mass affluent American seniors – typically defined as individuals with $100,000 to $1,500,000 of investable financial assets and an annual household income over $75,000 – could greatly benefit from using a reverse mortgage loan as a risk mitigation tool, which could reduce exposure to longevity and market risks while also growing investment portfolios.
This is according to a study published in the Journal of Financial Planning, co-authored by Phil Walker, Dr. Barry Sacks and Dr. Stephen Sacks.
With market volatility having accelerated recently, exposure to such volatility has the potential to destabilize the retirement plans of investors. This could disrupt the income and quality of life for such retirees. However, if a reverse mortgage is employed as a “buffer asset” during a time when market volatility is high, then drawing from a reverse mortgage line of credit until the market stabilizes can be an important step toward a more stable portfolio, the study says.
“[T]hose who use a reverse mortgage as a buffer asset in down-years stand to reduce their exposure to market volatility by nearly 10 times and could significantly increase their net worth over a 30-year retirement,” according to a statement released by Finance of America Reverse (FAR) based on the results.
To dive more deeply into the study’s findings, RMD sat down with co-author Phil Walker, who himself works as VP of strategic partnerships in the retirement strategies division at FAR.
Formulating the study, most surprising finding
As the broader reverse mortgage industry has been courting financial planners to serve as potential referral partners for some time, this new research was designed to offer additional corroboration to the potential benefits a reverse mortgage could provide to certain clients, Walker explained.
“I have been presenting the Coordinated Withdrawal Strategy, discovered in the Sacks and Sacks study of 2012, for years and to thousands of financial advisors,” Walker tells RMD. “It always received a very positive response from financial advisors, but almost no headway from the wealth management compliance world. I decided to reread the Sacks and Sacks study, and realized that since the strategy dramatically improves long-term portfolio growth without making any changes to that portfolio, something had to happen to risk.”
The goal of the study, in turn, was to both identify and quantify that risk, Walker says.
“We are taught as financial advisors the basic concepts of risk and reward,” he says. “Normally higher reward means higher risk. This strategy had to reduce risk somewhere and significantly. This led to the first finding that for retirees, volatility is risk.”
When asked about the most surprising finding, Walker quickly pointed to the level at which the identified risk could be addressed for a mass affluent retiree who chooses to incorporate a reverse mortgage into his or her retirement plan.
“What was most surprising from the research was the degree to which we can reduce risk was a significant discovery,” he says. “For years we’ve advocated for this strategy, but now we have stronger empirical data that adds further support to our strategy. The study found that using this strategy can reduce exposure to market volatility, and thus reduce exposure to risk, by nearly 10 times. This is far more than we initially imagined and it is significant given the ability to lower retirees’ risk of running out of money and substantially increasing their gains over time.”
Because many clients of financial professionals are concerned about their choices necessitating a step back in the ability to maintain a particular lifestyle, adding additional substantiation to determining the tolerance of risk by a client was a key finding, he says.
“Nobody wants to go backward, and the study shows that this strategy could be a very useful tool for wealth managers monitoring a client’s risk tolerance,” he says. “Dr Barry Sacks was instrumental in identifying that the benefit of using a buffer asset (reverse mortgage for most), could be beneficial at any point in the retirement. The highest benefit is obviously for those that use the strategy from the beginning of retirement, because the longer time horizon means more exposure to volatility, but there is still significant benefit for those that may only face one last down market in their retirement journey.”
What reverse mortgage originators should take from the study
When asked about the most actionable items of the research that could be applied to loan originators, Walker encouraged LOs to share the results with colleagues, contacts and relevant compliance departments.
“The conventional wisdom is that in retirement all debt is bad, but the study shows that this is no longer true,” Walker says. “Most of the mass affluent, those with $500,000 to $1.5 million in investable assets, are taking on unnecessary risk if they are not engaging the coordinated withdrawal strategy. As we mention in the study, the reduction in risk is significant and has fiduciary implications for advisors and their firms.”
The ability for a reverse mortgage to serve as a “buffer asset,” and with more corroborated information surrounding this strategy, can allow clients to make more informed choices regarding their investment and retirement planning decisions, he says.
“Originators should consider sharing the study with their local advisor firms and ask them to lift it up to their compliance departments,” Walker explains. “This is especially useful for the small-to-midsize RIAs, which tend to be more accessible and nimbler with change. Firms should also implement a vetting strategy to decide which clients to recommend the strategy.”
Impact for non-affluent borrowers
While the study was largely designed to provide information related to mass affluent clients, there are a few potential implications the research can have on more typically “needs-based” reverse mortgage borrowers, Walker says.
“If we assume that a needs-based borrower is likely to run out of money before life expectancy, they can potentially extend their portfolio life with this strategy,” he says. “However, these individuals typically do not have a financial advisor, so getting the information out to tax and other financial professionals could help. Right now, our findings have the greatest implications for the mass affluent and their financial advisors.”
This is because a mass affluent client will typically not run out of money if they’re using a safe withdrawal rate, but could benefit from the ability to “potentially give themselves an occasional raise or increase their legacy of philanthropic goals,” Walker says.
Read the study at the Financial Planning Association.