Earlier this week, a quick recap of a Forbes article about retirement risk — one in which the author claimed that reverse mortgages are products of “last resort” — generated some lively discussion in the Reverse Mortgage Daily comment section.
The thrust of the Forbes article was that Home Equity Conversion Mortgages are one form of protection against retirement “shocks,” or unexpected events that can foil even the most well-crafted plan — including divorce, unexpected medical expenses, or the loss of a job.
Naturally, some readers objected to the idea that a reverse mortgage should only be seen as a way to bail oneself out of a bad situation, given recent research about the potential benefits of using a HECM line of credit as part of a longer-term retirement blueprint: For instance, a borrower could tap into the line in a down market instead of dipping into a 401(k), thus allowing the investment time to recover.
In addition, the Forbes piece analyzes these shocks as discrete events, though it does note that a significant percentage of workers have experienced four or more during their lifetimes. Over at the Retirement Cafe, blogger Dirk Cotton looks at risky retirement events as part of a larger, interactive ecosystem — and uses an old reliable computer game to illustrate the effects.
In a recent post, Cotton invents “Risksweeper,” similar to the “Minesweeper” game that came with early versions of Microsoft Windows. As in the classic game, a worker or retiree must go through life largely blind of the obstacles that could appear, sometimes accidentally stepping on a “mine” — such as a medical expense or an economic recession.
“In the Risksweeper game, stepping on a single mine can end the game or only leave the player weakened,” Cotton writes. “But stepping on a mine that causes other mines to explode is likely to mean game over.”
He gives the example of a $5,000 medical bill as a “bang with a small blast radius,” unlikely to derail a retiree’s finances completely. But if that medical expense climbs to $250,000, it could set off other bombs in the area, such as the loss of a job due to the inability to work, which in turn could detonate a nearby credit-card bomb.
“The biggest risk on the playing board is not medical expense risk, consumer debt risk, or longevity risk,” Cotton asserts. “It’s a chain reaction of multiple dependent risks.”
Cotton also explores the concept of compounding risks within the reverse mortgage option itself, noting that the death of a spouse or an unexpected medical cost could lead to an inability to keep up with mandatory obligations — and, in turn, potentially facing foreclosure.
“This is not an argument to avoid reverse mortgages, by the way,” Cotton writes. “All financial strategies have risks and rewards. It is an argument to understand the risks as well as the rewards.”
Check out Cotton’s full take at the Retirement Cafe.
Written by Alex Spanko
