Reverse Mortgages Changing the Retirement Planning Paradigm
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November 17, 2015
in Blog

Reverse Mortgages Changing the Retirement Planning Paradigm

Reverse mortgages have been around since the 1980’s.  While these products aren’t new per se, they are being looked at in a new way.  “…They are becoming a “disruptive” way to leveraging home equity, says one reverse mortgage researcher.”  In a recent webinar, Barry H. Sacks, a San Francisco tax attorney states, “In the spirit of Silicon Valley, where the term “disruption” has become a buzzword among tech companies looking to radically change the conventional way things are done, reverse mortgages are disrupting long-held emotional attachments tied to the home and how it can be used in building retirement wealth.”  Sacks goes on to say that “…Using a reverse mortgage line of credit as part of a coordinated retirement strategy can help retirees…”1

A Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, is a Federal Housing Administration insured loan.  A HECM enables seniors age 62 and older to access a portion of their home’s equity to obtain tax free2 funds without having to make monthly mortgage payments.3

Sacks also co-authored an article in the Journal of Financial Planning in February 2012.  In his article he outlines three uses for home equity through a reverse mortgage line of credit to supplement withdrawals from one’s retirement accounts.1

The first strategy draws upon the conventional wisdom that a reverse mortgage should be used as a last resort, and only if and when your retirement accounts have been exhausted.  The other two are more active approaches.  In the second strategy, called the “reverse-mortgage-first strategy”, the homeowner obtains a reverse mortgage at retirement, and then draws on the line of credit annually until it’s exhausted.  The third approach is called the “coordinated strategy” and is a bit more complex.  In this strategy the homeowner obtains a reverse mortgage, but only draws on the line of credit at certain times based on an algorithm.  The algorithm coordinates withdrawals between your line of credit and retirement accounts.4  The idea is to draw on your reverse mortgage line of credit at the appropriate time in order to allow your retirement accounts such as your 401(k) or IRA to continue growing.  “This can be a critical strategy for retirees, considering the most frequent cause of retirement account exhaustion is the sequence of returns risk.”1  Rather than using the “wait and see” method, this more proactive approach may help to reduce the risk of running out of money too soon.

If you or someone you know is interested in finding out more about these strategies and how a reverse mortgage line of credit could help, call 800-218-1415.

 

1 Reverse Mortgages Offer ‘Disruptive’ Retirement Strategy – reversemortgagedaily.com, by Jason Oliva, 10/26/15, http://reversemortgagedaily.com/2015/10/26/reverse-mortgages-offer-disruptive-retirement-strategy/

2 Consult your financial advisor and appropriate government agencies for any effect on taxes or government benefits.

3 You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance and maintain the home according to Federal Housing Administration requirements.

4 Journal of Financial Planning, Reversing the Conventional Wisdom:  Using Home Equity to Supplement Retirement Income, by Barry H. Sacks, J.D., Ph.D., and Stephen R. Sacks, Ph.D., February 2012.

Author:  Meredith Manz