Do you remember two and three decades ago? When we worked hard, saved for retirement, invested in our 401k’s, paid down our mortgages…all while dreaming of the years we’d finally be able to retire? It was an optimistic time and so many did everything right. Unfortunately many of those same dedicated individuals faced trouble during the economic downturn less than a decade ago. With lay offs and investments gone sour, soon-to-be retirees had to tap into their 401k’s to stay afloat, potential pensions went stagnant, and they watched their retirement dreams dwindle. Retirement and financial planners have been picking up the pieces ever since, trying to determine how these hard working Americans can still enjoy the golden years they deserve. And what they are discovering is that one of the largest assets of many retirees – their home – has been grossly overlooked as a retirement tool. Reverse mortgages were only considered a last resort and were rarely discussed, let alone considered part of an upfront retirement plan. Well, things have changed – a lot.
In a recent article for Wall Street Journal, retirement expert Wade Pfau says this:
Let me explain why reverse mortgages can help. Retirees have a series of expenses they must be able to support to enjoy a successful retirement. These expenses consist of overall lifestyle spending goals, unexpected contingencies and legacy goals. The task is to manage their assets in a way that efficiently meets goals and mitigates retirement risks related to not knowing how long you will live, to market volatility, and to spending surprises that can impact the plan. The reverse-mortgage option should be viewed as a method for responsible retirees to create liquidity from an otherwise illiquid asset, which in turn can create new options that potentially support a more efficient retirement income strategy, such as more spending and/or more legacy.
Intuitively, there are two reasons why opening a reverse mortgage earlier in retirement has the potential to improve retirement efficiencies despite the reverse-mortgage costs for those wishing to remain in their homes.
First, coordinating draws from a reverse mortgage reduces the strain on investment portfolio withdrawals, which helps to manage the sequence of returns risk facing retirees. Retirees are more exposed to investment volatility because volatility has a bigger impact on financial outcomes when taking distributions from the portfolio as compared with when adding new funds to the portfolio. Reverse mortgages provide a buffer asset to sidestep this sequence risk by providing an alternative source of spending after market declines.
The second potential benefit for opening the reverse mortgage early, especially when interest rates are low, is that the principal limit that can be borrowed from will continue to grow throughout retirement. Reverse mortgages are non-recourse loans, and for sufficiently long retirements, there is a reasonable possibility that the line of credit may grow to be larger than the value of the home.
To witness a reverse mortgage completely alter the uncertain course many retirees believe they are on is wonderful. This is about so much more than utilizing a program that has long been available, it’s about truly helping seniors live out the retirement of their dreams. The retirement they were once so optimistic about, the one they worked so hard to achieve.
Reverse mortgages are available to many senior homeowners 62 and over. These loans are insured by the FHA and provide non-taxable income to the borrowers based on the available equity in the home. The more equity and the older the borrower, the more funds available. The funds can be accessed via a line of credit, monthly installments, a lump sum, and even can be wrapped into the purchase of a new home. The borrower can always use the funds for whatever they deem fit. Working with a retirement planner or financial adviser will help ensure the most strategic use of the loan.
Janis Layman is a Reverse Mortgage Specialist serving the Seattle, Lynnwood, Edmonds, and Shoreline areas of Washington. Contact Janis and learn if reverse mortgage is right for you.