Reverse

Spotlight: Retirement Expert Wade Pfau

Written by Jessica Guerin  , as originally published in The Reverse Review.

A professor of Retirement Income at The American College, Wade Pfau works to educate financial planners on retirement income strategy. Lately, his focus has shifted from Social Security withdrawal strategies to reverse mortgages.

“It’s important because it is such a big asset. The average American does not have a large 401(k) balance or a large pool of investment assets,” says Pfau, who has a Ph.D. in economics from Princeton University. “For most Americans, Social Security benefits and home equity are going to be the two biggest assets on their balance sheet.”

A frequent Forbes contributor, Pfau has written numerous articles explaining how HECMs can be strategically used in retirement planning. He says that although reverse mortgages have fought a long battle against negative public perception, things do appear to be turning around.

“I think some of the negative media coverage in the past has been related to the fact that some people were using reverse mortgages as a last resort, and ultimately their plan was not sustainable,” he says. “Recent changes were designed to better match the program with the research we’ve seen over the last couple of years, which is how to incorporate it into a responsible retirement income plan.”

Pfau says the conversation about reverse mortgages has picked up in the past four years with an increasing number of articles (in the Journal of Financial Planning, for example) exploring their use. This, paired with government changes designed to position the product as a financial planning tool, has helped push some financial professionals to revisit the product.

Still, Pfau admits that there is a long way to go toward widespread acceptance. He says that some advisors wrote them off years ago and may not recognize the need to reassess the product.

“Advisors may have done their due diligence about them in the past and decided that this was something that had high fees and only worked in cases where clients were running out of money,” he says. “Any self-respecting advisor is trying to make sure that their clients are not going to be in a situation where they’re desperate and have to use a last resort, so they didn’t really think it was something that clients would ever need.”

Another problem, Pfau says, lies within the segregation of the financial services industry. “Within financial services, there are different types of business models. Some people are only able to sell and manage investments, so for them everything is an investment solution. Some people only work with insurance, so for them everything has an insurance position. Neither one of those has a way to incorporate a reverse mortgage into their business models.”

Still, Pfau says he thinks reverse mortgages will continue to gain steam among the financial planning world.

“I already see in motion the increasingly positive press coverage that reverse mortgages have been receiving,” he says. “As that process continues, it’s going to slowly change the public perception. It will be a slow process, but it’s in motion now and it will continue to build in that direction.”

To help advance the cause, Pfau says HECM professionals can learn how to better connect with financial advisors and gain a better understanding of retirement income planning, which he says is distinctly different from traditional financial planning.

“I think it would help reverse mortgage professionals to understand more about the retirement income planning problem… to understand retirement risk and how a reverse mortgage can fit into that to help manage the return of risk or the risk created by large spending shocks like long-term care expenses.”

Pfau, who is planning to release a book this summer on reverse mortgages and their role in retirement planning, says he expects the topic to become increasingly popular in the advisor community.

“Over the past few years, Social Security was the hot topic in retirement. People were providing the education to clients and running free lunch seminars where they would explain how to claim Social Security benefits and so forth, and I think that topic has sort of run out of steam at this point,” he says. “I really think reverse mortgages are going to be the next hot topic, replacing Social Security claiming as the big topic over the next few years.”

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