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Viewing Reverse Mortgages as ‘Last Resorts’ Could Thwart Successful Retirement

There are three major misconceptions that can lead to someone having an unsuccessful retirement, defined here as having no assets when someone passes away. One such misconception is that a reverse mortgage loan is a “last resort” option, since such loans can be a major factor when used as a component of a larger retirement strategy.

This is according to Dr. Chia-Li Chien, director of the financial planning program at California Lutheran University in Thousand Oaks, Calif. in a new column at the Pacific Coast Business Times.

“I took U.S. government population data, including the Survey of Income and Program Participation from the Census Bureau, and used simulations to measure the success rate of the retiree population,” Dr. Chien writes. “I define retirement success as still having at least a penny left in assets when one dies. I factored the simulation testing with the published survival probability life tables from the Social Security Administration up until age 119. You probably won’t live that long, but like it or not, many of us are going to live much longer than expected, and you don’t want to outlive your money.”

This data helped Dr. Chien assert that unsuccessful retirements can stem from three major misconceptions when it comes to retirement planning. One of these misconceptions is that a reverse mortgage can only be used as a loan of “last resort,” she says.

“Home equity is the largest asset of American families. Both retirees and their financial advisers may not understand that a reverse mortgage is a retirement strategy,” she says. “The Home Equity Conversion Mortgage (HECM) is the Federal Housing Administration (FHA)’s reverse mortgage program that allows qualified retirees to stay in their own home by withdrawing some of the home equity. My study found that it improved 10% of the couples’ households and 9% of singles’ households in California.”

In the state of California, 64% of couples’ households and 53% of singles’ households are eligible for a HECM loan, she says.

“My research tested seven different scenarios in various combinations of retirement strategies of delaying claiming Social Security retirement benefits, continuous working and HECM in each of the 50 states,” she continues. “In general, using combined retirement strategies resulted in a higher percentage of the retirees having a successful retirement. Other practical strategies include downsizing by migrating to different states, considering pension payout options, looking into non-traditional partners situations, and immigrants considering retiring to their home country.”

The two other major misconceptions noted by Dr. Chien are the ideas that “you need $1 million to retire,” and “you should take Social Security benefits as soon as you qualify.”

Read the column at the Pacific Coast Business Times.