Study Makes Case for $1 Million Reverse Mortgage Retirement Strategy
Several studies have already demonstrated the potential benefits to be reaped when using a reverse
mortgage as part of a coordinated retirement strategy, but one recent case study further expounds
on the efficacy of the reverse mortgage line of credit.
With the arrival of new program changes and consumer protections in recent years, the reverse
mortgage industry has strived to assert the legitimacy of the Home Equity Conversion Mortgage
(HECM) as a viable retirement income planning tool.
A variety of financial planning research published within the last decade has added layers of
credibility to reverse mortgages as a financial resource that can help “buffer” against volatility
in investment markets, increase retirement spending and, above all, significantly improve the
longevity of a retiree’s retirement income.
The crux of these strategies invariably requires retirees to obtain a reverse mortgage line of
credit early in retirement. By doing so, retirees can accumulate a greater share of home equity
over time, which they can use to supplement their retirement spending and help shore up losses in
their investment portfolio during years of negative market returns.
“In this strategy, the reverse mortgage credit line is used to offset the ‘adverse sequence of
returns,’” states a case study published by Barry Sacks and Mary Jo Lafaye this year and further
discussed by Tom Davison, a wealth manager who has frequently researched and written about reverse
mortgages in the context of financial planning.
In demonstrating the coordinated planning strategy, which was previously introduced by Barry and
Stephen Sacks in the Journal of Financial Planning in 2012, Sacks and Lafaye establish a retiree
with a $500,000 equity/bond portfolio split 50/50. Beginning in 1973, the case study examines a
30-year spending horizon, incorporating an initial 5.5% withdrawal
rate increasing at a 3.5% inflation rate.
Sacks and Lafaye then compared two scenarios involving the same retiree: one scenario in which the
retiree obtains a reverse mortgage only after his investment portfolio is depleted; and a scenario
in which the retiree takes a reverse mortgage line of credit early in re irement,
only drawing from the credit line after suffering negative returns on his portfolio.
Utilizing a reverse mortgage as a last resort strategy, the retiree ends up depleting his portfolio
in 1996—six years short of the 30-year retirement horizon, according to Sacks and Lafaye.
On the other hand, by tapping into the reverse mortgage loan proceeds after suffering negative
returns, the same retiree is able to fund their retirement for the full 30-year period. What’s more
is that in this scenario, the retiree’s total portfolio value has grown in excess of
$1 million after 30 years.
Taking the difference between the total portfolio value and the accumulated reverse mortgage loan
balance, the retiree ends up with a net $394,991, whereas under the “last resort” strategy the same
retiree is left with a $538,773 reverse mortgage loan balance and no money in the investment
portfolio to offset this debt.
“Using the simple coordinated strategy has dramatic results: they don’t run out of money,” Davison
writes in a recent post on his blog, Tools for Retirement Planning. “Their estate size increases
over $900,000. Rather than the portfolio exhausting in the 24th year, it lasts through the 30th
year, with a $1,000,000 balance.”
Taking the reverse mortgage was critical to the long-term sustainability of the retiree’s
portfolio, especially during the first decade of retirement when the portfolio suffered various
years of negative returns in close succession.
“The strategy is simple to state and simple to use,” Davison writes. “It is a direct attack on
investment risk, and especially sequence of returns risk. Individual homeowners can do this!”
As the research shows, homeowners need to obtain a reverse mortgage line of credit as early in
retirement as possible for the coordinated planning strategy to be effective.
“Naturally, the larger the reverse mortgage line of credit is, the more it can help the homeowner,”
writes Davison.
Written by Jason Oliva, Reverse Mortgage Daily
