New Paper Spells Out Reverse Mortgage Strategies for Financial Planners

A recent paper published in The Journal of Retirement offers a comprehensive catalog of the various strategies in which a reverse mortgage can be used in retirement planning today, detailing the effectiveness of these loans in increasing portfolio longevity and spending power for retirees.

The article—authored by Tom Davison, a reverse mortgage blogger and financial planning partner emeritus at Summit Financial Strategies, Inc., and Keith Turner, a reverse mortgage advisor with Retirement Funding Solutions—mainly addresses financial planner working with clients who have an interest in reverse mortgages.

In doing so, Davison and Turner frame the paper around a slew of research from established reverse mortgage researchers such as John Salter, Harold Evensky, Shaun Pfeiffer, who have studied the “standby” reverse mortgage line of credit strategy; as well as Wade Pfau and Barry Sacks, whose respective research has also focused on the use of a reverse mortgage line of credit and the synergies it can produce when used as part of a comprehensive retirement planning strategy.

“Today, there is an evolving understanding of reverse mortgages as a valuable financial planning tool,” write Davison and Turner. “Reverse mortgages are now seen as well suited for retirees—not only homeowners who are underfunded and turn to a reverse mortgage as a last resort, but also those who enter retirement well-funded.”

Because reverse mortgages do not offer a one-size-fits-all solution, the authors note that it is useful to think of these products as being used differently by three homeowner profiles: individuals whose retirement plans are well-funding, those whose plans are constrained and others who are under-funded.

Those fitting into the “well-funded” description, the authors note, may use a reverse mortgage line of credit as a standby or emergency fund; their Monte Carlo success rate is high (over 85%), indicating they may rarely face a spending shortfall during retirement.

Meanwhile, constrained clients are those who typically have Social Security or a pension and a “medium-sized” investment portfolio. This group, according to the authors, has a Monte Carlo success rate ranging from 65% – 85%, indicating higher chances they will need to cut future spending due to underperforming financial markets.

“Their plan may have no cushion to absorb unplanned-for events such as higher medical costs or greater longevity,” write Davison and Turner. “Constrained clients may especially benefit from using a reverse mortgage in concert with their investment portfolio or other assets.”

Lastly, there are under-funded clients—those who may need cash flow immediately and may obtain a reverse mortgage as a last resort only after exhausting all of their other resources. This group’s Monte Carlo success rates are low, perhaps 60% or less.

“These clients may have the greatest need for a reverse mortgage,” the authors write. “However, it can be demonstrated, using Monte Carlo simulation, that under-funded retirees with home equity that is equal to, or greater than, their relatively low level of invested assets can gain a tremendous boost from the use of an RMLOC [reverse mortgage line of credit]. The challenge may be to maintain a strong financial discipline and to use the reverse mortgage judiciously to their greatest long-term advantage.”

An important conclusion of the article is that reverse mortgages can help with a retiree’s three basic concerns: enhancing sustainable spending, serving as an emergency fund, and even boosting estate sizes, according to Davison and Turner.

“Overall, the major positive surprise is the value reverse mortgages can add to the lives of retirees, both those who already look forward to a satisfying retirement and those who are not as well prepared financially but will make it through,” Davison and Turner write. “This bodes well for a country with a rapidly expanding and aging retiree population.”

View the paper.

Written by Jason Oliva

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