Mortgage Professor: ‘Partial Retirement’ Should be Embraced Through Reverse Mortgages

As a growing number of older Americans may find it difficult to maintain their lifestyles through traditional fixed income streams, the idea of “partial retirement” — where a senior could maintain one or more part-time jobs — should be further embraced by the financial world. To support this, a senior’s strategic use of a reverse mortgage could be very beneficial.

This is according to Jack Guttentag, aka the “Mortgage Professor,” in a new column at Forbes. The ways in which retirement saving programs have changed further exacerbates the problems associated with retirement in America, necessitating new solutions to old problems.

“People are living longer but they are not increasing the accumulated wealth needed to support a longer life of retirement,” Guttentag writes. “On the contrary, the swing from defined benefit to defined contribution pension plans has increased the population of those reaching retirement age without adequate provision.”

It is this trend that has given greater rise to the idea that Guttentag refers to as “partial retirement,” which he defines as a person at or beyond retirement age maintaining continued employment but at a reduced scale, and with commensurately reduced income.

“A retirement plan to accommodate them should notch at the age when partial retirement becomes full retirement, at which point retirement payments should jump to a higher level,” he says.

Embracing partial retirement on a wider scale does have some individually-defined factors, not the least of which being the financial situation of the retiree in question. These people tend to fall into a category that many in the reverse mortgage business commonly refer to as “house rich, but cash poor,” according to Guttentag.

“A large segment of [affected seniors] are homeowners with minimal financial assets, and I will use this group as my example,” he says. “The hypothetical retiree is 62, has financial assets of $150,000 and a debt-free house worth $500,000. His plan is to work half time for 8-12 more years, then retire full-time. Hence, he needs a retirement payment for 8-12 years to offset his switch to half-time employment, and a larger retirement payment thereafter to offset his switch to full retirement.”

These goals can be adequately accomplished via a potential tactic Guttentag has been citing a lot recently, namely combining an annuity with a Home Equity Conversion Mortgage (HECM).

“During the 8-year period, the retiree would draw funds monthly against a HECM reverse mortgage credit line,” Guttentag says. “During that period, the unused part of the credit line would grow at the HECM interest rate plus insurance premium, currently about 3.4%, accruing a reserve.”

Read the column at Forbes.

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