Kiplinger: In tough economic times, new retirees need a financial plan

Such a plan could include a reverse mortgage, according to input from Wade Pfau

The retirement landscape is being heavily impacted by economic volatility stemming from high levels of inflation, so anyone that is either on the cusp of retirement or newly-retired would be well-suited by the development of a financial plan. That plan might be optimized with a reverse mortgage, according to a column published this week at Kiplinger.

“A portfolio tends to be largest near retirement, just before those savings are about to be drawn down,” the column reads. “These days, however, most portfolios have lost value; the S&P 500 is down about 20% so far this year. The financial industry has a name for this scenario: sequence of return risk.”

Retirement income professor Wade Pfau has recommended the use of a reverse mortgage in retirement.
Wade Pfau

That type of risk has been discussed a lot by Wade Pfau, professor of retirement income at the American College of Financial Services in King of Prussia, Pa., who spoke to Kiplinger for the story.

“You need to sell a larger number of shares to get the same amount of money. Those shares are then gone so even if the market bounces back, your portfolio won’t recover as much,” he said.

However, for someone further along in retirement, that risk is less pronounced, the column reads.

“Sequence of return risk is less of a concern for someone further along in retirement because retirees typically shift to safer, more conservative investments and have fewer years to pay for,” the column says. “Plus, these investors may have benefited from portfolios boosted by strong returns early in retirement.”

However, a plan for a bad situation is always advisable, and there are situations where a reverse mortgage could fit well into such a plan, the column says based on input from Pfau.

“Pfau also suggests looking into your other assets, like borrowing the cash value from a life insurance policy or using a reverse mortgage to tap into your home equity, as alternative sources of income while the market is down,” the column reads. “When the market recovers, he says it’s up to you whether you want to pay back those loans, depending on how much you want to leave heirs.”

Other tips to overcome current economic challenges could include lowering a withdrawal rate; adding new diversity to a portfolio to potentially make it more resilient to different pressures; or the consideration of an annuity.

Read the column at Kiplinger.

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