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CFPB / RegulatoryMortgage

Should you use home equity to delay Social Security?

The CFPB warned against it, but experts say it works

For some time, reverse mortgage lenders touted a strategy that involves obtaining a HECM early on in retirement in order to delay taking Social Security, therefore maximizing the benefits you can receive.  

For every year that you can delay taking Social Security from 62 to 70, you can get as much as 8% more. For those who don’t have a lot of savings but do have a lot of equity in their house, tapping that equity to fund living expenses could help bridge the gap until they apply for Social Security at an older age.

Many HECM marketers promoted this strategy as a smart use of a reverse mortgage, and on the surface it made sense. Most Americans’ greatest source of income in retirement is Social Security, and they can maximize this benefit by using what may be their greatest resource – the equity in their homes – to achieve a better financial outcome.

But last year, the Consumer Financial Protection Bureau took issue with this strategy, releasing a statement warning consumers against using the product in this way.

The CFPB cautioned that the cost and risk of taking a reverse mortgage exceeded the benefit bump.

According the CFPB report, the expense of taking a reverse mortgage means that by age 69, the cost of the loan exceeds the cumulative lifetime benefits of a reverse by $2,300. It also asserted that withdrawing home equity could limit a senior’s options should they want to move or if they experienced a financial shock.

“A reverse mortgage loan can help some older homeowners meet financial needs, but can also jeopardize their retirement if not used carefully,” former CFPB Director Richard Cordray said at the time. “For consumers whose main asset is their home, taking out a reverse mortgage to delay Social Security claiming may risk their financial security because the cost of the loan will likely be more than the benefit they gain.

But some financial experts disagreed.

Jamie Hopkins, Co-Director of the American College’s New York Life Center for Retirement Income, called the CFPB report “limited in scope” and “riddled with inaccurate statements.”

In an article for Forbes, Hopkins said the bureau makes its case based on one scenario that has a low present value benefit from deferral and no adjustment for inflation, and it fails to mention longevity protection.

“The CFPB’s analysis, misrepresentations, and inaccurate conclusions fail to provide a comprehensive review of potential benefits of Social Security deferral and proper use of home equity,” Hopkins wrote. “Instead the report unleashed an overly broad and inaccurate censure that could hamper meaningful discussion.”

Renown retirement researcher Wade Pfau, who has written a book on reverse mortgage strategies, wrote a lengthy and detailed rebuttal of the CFPB’s findings on his blog, Advisor Perspectives, titled “The CFPB Is Wrong About Reverse Mortgages.”

“I am disappointed that this report was issued and heralded with a press release and other promotion by the CFPB,” Pfau wrote. “For those who have retired at 62, what is the best way to coordinate Social Security claiming, home equity, and the investment portfolio to build an efficient overall retirement income plan? The report failed to answer this adequately.”

Pfau’s post provides various mathematical examples illustrating what happens to an individual’s overall portfolio should they delay Social Security through the use of a HECM in a number of different ways.

In the end, he concludes that there is value in the strategy, contrary to the CFPB’s report.

“Using a HECM to fund Social Security delay does not create greater risk for retirees experiencing spending shocks or needing to move later in retirement, because reduced distribution needs from the investment portfolio and the subsequent reduction in sequence risk offset the reverse-mortgage costs and preserve overall net worth,” Pfau wrote.

But while both Pfau and Hopkins say the strategy can work, they also agree that suitability needs to be determined on a case-by-case basis.

Tom Dickson, advisor channel leader at Reverse Mortgage Funding, said the lender still considers this to be a valid strategy, but not one that is very popular.

“We found that while financial advisors are interested in the idea, they have a very, very, very difficult time persuading their clients to defer their benefit,” Dickson said. “It’s certainly a solid idea, it’s just in the marketplace, it’s not one that advisors have had a lot of success with in terms of client adoption.”

“I have held many webinars on Social Security and have introduced the idea of using a HECM as part of a deferral strategy, but always as part of the assumption that you need to look at one client case at a time,” Dickson continued. “We are big believers in comprehensive financial planning.”

David Holland, a certified financial planner whose firm – Holland Financial – has a reverse mortgage division, said he would recommend the strategy to clients if the shoe fit.

“As a CFP practitioner, I have analyzed many situations and advised on Social Security claiming strategies and timing. I can tell you that there are situations where the reverse mortgage loan would make sense. There are many factors that need to be considered,” Holland said.

Ultimately, Holland said issuing broad statements about financial planning strategies is problematic, because it all depends on individual circumstances.

“Everybody’s situation is different,” he said. “Any general guidance that is put out there about these strategies, they’re good places to start, they’re not good places to finish.”

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