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When Last Resort Reverse Mortgages Are the ‘Best Resort’

The idea that reverse mortgages should be used only as a last resort once all other options have been exhausted is becoming an antiquated perception. But there are some situations where using a reverse mortgage as a last resort can be the “best resort,” says one financial planner in a recent blog post.

Research published in recent years, such as those from Barry Sacks and Stephen Sacks as well as Wade Pfau, have demonstrated that by reversing the conventional wisdom on reverse mortgages, that is, using home equity early in retirement as opposed to a last resort, retirees can actually increase the spending horizon of their invested retirement portfolios.

But while researchers maintain that the early use of a reverse mortgage can provide the best strategy to supplementing a retirement income plan, there are also certain scenarios in which spending home equity as a last resort would be advantageous, writes Dirk Cotton, a fee-only financial planner, in his blog The Retirement Cafe.

One such scenario, Cotton suggests, involves avoiding risk to home ownership when it may never become necessary. This could be particularly true for retirees who wish to leave their homes to heirs, but realize they might not be able to pay for retirement without using home equity.

“By spending home equity as a last resort instead of committing it early in retirement, the latter group might find that they never need to risk their home or that they can at least minimize the amount of equity they do need to spend,” he writes. “Think of it as matching home equity to contingent late-retirement liabilities.”

It’s also important for retirees to control their balance sheet leverage, since any balance sheet that includes debt is leveraged.

“Retirees who spend home equity as a last resort after depleting their portfolio will not simultaneously hold reverse mortgage debt and an investment portfolio—they will hold them sequentially,” Cotton writes. “That doesn’t mean they won’t have leverage from other debts, or that the amount of leverage created by the reverse mortgage will be imprudent. That depends on the rest of the balance sheet. But, it does provide an opportunity to manage that leverage.”

Read more at The Retirement Cafe here.

Written by Jason Oliva