Investing Expert: Reverse Mortgages Can Help ‘Immunize’ Spending

When it comes to retirement planning, someone should do their best to “immunize” their spending to make sure that both necessary obligations are continuing to be met month after month, while also ensuring that an appropriate amount of money is spent on maintaining a good quality of life and so that someone can have fun in their post-working lives.

This is a perspective shared by Michael Falk, an investing expert who recently spoke with Jeff Ptak and Christine Benz of Morningstar’s podcast “The Long View.”

When it comes to defining what it means to “immunize” spending, Falk explains that it comes down to a division into two separate, but important “buckets.”

“Many years ago, I coined a term, you should immunize before you even try to optimize,” Falk explains. “And what I’m referencing here is, take your entire spending plan, everything you spend money on every month, and divide it into two pieces: fixed spending that happens no matter what and fun or aspirational spending.”

It begins with asking some key questions about the realities of spending in retirement, including what coverage someone has for fixed life spending, such as Social Security benefits or pension payments.

“If you have coverage, then we know that your fixed spending is immunized,” Falk says. “The goal here then […] is to ask to what extent should we be looking [at] annuities, or laddered bonds, or reverse mortgage[s] to immunize that fixed spending. Because then once we do that, we can bias the portfolio heavily toward equities, or other risky assets, for the aspirational spending because even if there is a bad year, you can still cover your costs. You don’t have to worry about liquidating at a bad time.”

Specifically when it comes to the employment of a reverse mortgage in a retirement plan, Falk explains that it is one of three possible solutions for an immunization of the spending portfolio. The other two include laddered bonds and annuities.

“With annuity contracts, find an annuity expert,” Falk advises. “The complexity in these things that seems straightforward is real. Laddered bonds, well, here is simplicity, given interest rates today, or expected in the near future, maybe we don’t even have to think about that choice.”

Specifically for reverse mortgages, a senior should think carefully about how that decision could impact potential heirs once they pass away, Falk says.

“Reverse mortgage, now this gets into other bequest aspects of someone’s estate plan,” he says. “And can they stay in that house as they age? Are they going to have to sell it? And it gets into a different conversation then that connects with retirement planning that has to then get into the estate planning side of the dialogue.”

Listen to the episode of “The Long View” featuring Michael Falk at Morningstar.

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