How today’s successful advisors are incorporating reverse mortgages in their practices
by Don Graves, President of the Institute for Housing Wealth Studies
With the current retirement income crisis facing baby boomers, advisors need every viable resource to help their clients and sustain their practice. One resource, often overlooked, is home equity. Currently there is more than 6 trillion dollars in senior home equity, and for the majority of boomers this represents their most significant asset. The question for advisors is: How can this nonperforming asset be turned into a resource that can impact and improve retirement outcomes?
This is a question I’ve explored at great length as an instructor of retirement income at the American College of Financial Services, and after more than 20,000 advisor/client engagements over nearly two decades, it’s clear that one equity-unlocking tool in particular has been left unexplored by the vast majority of financial planners—the reverse mortgage.
Much has changed in recent years, and the reverse mortgage has now come front and center. Buoyed by academic research, endorsements from financial thought leaders and institutions, and FINRA’s reversal of its former “last resort” position, reverse mortgages have become a tool that advisors cannot afford to leave out of the retirement planning conversation.
A Home Equity Conversion Mortgage (HECM) is a type of reverse mortgage that allows seniors age 62 or older to convert a portion of their home’s value into tax-free dollars without having to make monthly mortgage payments. However, to see the real retirement-planning power of the HECM, we need to look at a sample couple and explore how it might impact their retirement.
Bob and Mary are both age 65, have $400,000 in savings and live in a $400,000 home. They currently have a mortgage balance of $75,000 for which they are paying $800/month. Let’s look at how housing wealth can expand the retirement income conversation.
In this scenario, the HECM makes around $151,200 available. The reverse mortgage must be a first mortgage, so a portion of the proceeds must go towards paying off their current $75,000 mortgage. This does two things for Bob and Mary. It eliminates their mandatory $800/month payment and it establishes a $76,200 growing HECM line of credit.
Four Planing Conversations Generated by the Reverse Mortgage
Let’s take a brief look at a few HECM-infused planning conversations Bob and Mary’s advisor could have with them.
After eliminating their $800/month mortgage payment, the clients can reduce the draw on their savings by nearly $10,000 a year. If the clients were using a 4 percent initial withdrawal rate ($16,000), this could now be reduced to $6,000, and continue in like manner for nearly another decade, thereby increasing the longevity of their savings.
Premium Funding Replacement
Perhaps Bob and Mary were comfortable making their mortgage payments and their portfolio status was not a concern, but their plan still had some gaps. By liberating the $800/month payment, the clients are free to reimagine how those dollars can be sued for planning purposes such as long-term care, life insurance, juvenile insurance for grandchildren or simply a reserve for payments on existing policies.
The two danger zones in retirement are the beginning and the end. Often referred to as the “go-go” years, the first part of retirement is when new retirees tend to (over)spend the most—crossing their fingers and hoping that things will somehow work out in the end.
Using the liberated mortgage payment dollars allows Bob and Mary to increase their monthly lifestyle spending by $800, and if needed, they could always draw out more from their growing line of credit. This reduces early portfolio draws and potential sequence risk; it gives the clients peace of mind by having a “budget buffer” for purchases.
The accompanying chart shows the growing HECM line of credit, if Bob and Mary didn’t have an existing mortgage balance to pay off. Here is the real hidden power of the program. Not only does the line of credit have a built-in, guaranteed growth factor, it cannot be frozen, canceled or reduced, as long as the terms of the loan are being met. Furthermore, its real power is its ability to be converted into a monthly income stream at any time in the future. It’s this “convertibility” that provides a type of insurance and peace of mind for clients.
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Space will not allow us to cover the myriad of other ways that the HECM line of credit changes the conversation (e.g., Social Security deferral, Roth conversions, re-imagining RMDs, creating a long-term care plan, mitigating volatility risk, gray divorce or creating new investible dollars with the HECM for purchase).
The ways in which housing wealth is positively impacting retirement outcomes are proven, verifiable, and worthy of further exploration.
Seniors are most likely sitting on their biggest asset. Now you know just a few ways your housing wealth can help you sleep better in retirement.
Don Graves, RICP®, is the president of the Housing Wealth Institue and an instructor of retirement income at the American College of Financial Services. He is considered one of the nation’s leading educators and authors on incorporating housing wealth into retirement income planning. You can find his recent book, Housing Wealth, on Amazon or his website www.HousingWealth.net.