Is it Smart to Get a Reverse Mortgage Line of Credit Early in Retirement?

As more and more wealth managers research the Reverse Mortgage (HECM) product they are finding it to be a much safer and credible buffer against volatile investment markets as well as a way to extend your retirement income. This is a great article pointing out these advantages as reported in the Journal of Financial Planning and  recent follow up studies by wealth management professionals. - Melinda

A $1 Million Reverse Mortgage Retirement Strategy!
Written by Jason Oliva

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 retirement, 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

6 Challenges to Achieving Retirement Security

Here's a great article regarding the challenges facing workers ability to plan for retirement. As with any retirement plan, the earlier you start anticipating the more prepared you will be for the execution of it. - Melinda 

By Steve Vernon MoneyWatch June 24, 2016, 5:00 AM

Americans from all walks of life face several overarching challenges to their retirement security and personal savings. More specifically, they have to deal with six primary obstacles that make it harder for them to put away enough money to have a secure retirement.

The Bipartisan Policy Center (BPC), a Washington, D.C., nonprofit organization that researches solutions to the nation's key challenges, boiled it down to this number in a comprehensive, 152-page report that provides thorough analyses of these challenges. And it offers thoughtful recommendations for policies that governments, employers and financial institutions can adopt to address these challenges.

Since it might take years for any such policies to actually take affect, let's look at the six challenges and see what action steps you can take now to address each one.

Challenge 1: A lack of access to workplace retirement savings plans
Only 49 percent of all American workers participate in a workplace retirement plan. Of the rest, just more than one-third have no savings plan at work, and 17 percent are eligible to participate but don't contribute to their plan. Many are part-time or low-income workers and are particularly vulnerable.
Here's just one compelling example of the power of these plans: The Employee Benefit Research Institute (EBRI) projects that more than half (56 percent) of all moderate-income Gen-Xers who don't participate in a savings plan at work will run out of money in retirement. By contrast, the EBRI projects that among workers who save for at least 20 years in a work-based plan, only 12 percent will experience that fate.

If you're eligible for a work-based savings plan but don't contribute, sign up as soon as you can. If that's a stretch, sign up for a low contribution rate, such as 1 percent of your salary, and increase your savings in future years. If you're not eligible to participate, you can start contributing to a myRA or an IRA at a financial institution such as a bank, mutual fund company or insurance company.
If you spend all of your paycheck on current needs, see if your employer or financial institution offers a financial wellness program that can help you squeeze some savings out of your daily budget.

Challenge 2: Lacking income or resources to save for short-term needs, many Americans raid their retirement accounts.
Building an emergency fund to protect against unexpected shocks can be just as important as saving for retirement. Unprepared individuals who experience accidents, health problems, car repairs or job losses are more likely to take on debt or tap their retirement savings. More than half of all Americans are unable to meet a $2,000 emergency without selling personal assets or taking out payday loans.
In part, weak earnings are to blame because many individuals simply spend all their income to meet current needs. Rising costs for college and health care also leave little room to cover other needs.
If possible, you should make it a priority to set aside emergency funds in addition to retirement savings. Start with a target of $500, and over time see if you can build up to $2,000 for your emergency cushion. Once again, a financial wellness program can be a good source of ideas for finding some money in your regular budget.

Amid today's low interest rates, it's pointless to try to earn significant amounts of interest income. Still, it's OK to settle for a low-interest passbook savings account or a money market fund.

Challenge 3: Americans are increasingly at risk of outliving their savings
As Americans live longer lives, it's possible that retirement can last for 20 to 30 years, or more. Supporting lengthy retirements takes not only a lot of savings. You'll also need a thoughtful strategy to generate retirement income that you can't outlive. If you're in your 50s or older, you'll want to learn how to optimize your Social Security benefits and find out more about the pros and cons of lifetime annuities from insurance companies and prudent drawdown strategies using invested assets.

Many people who do a good job of assessing their savings and estimating their retirement income may find that they need to work longer or spend less money in retirement. Both can be effective ways to avoid outliving your savings.

Challenge 4: Home equity is underutilized in retirement -- if it lasts until then.
The BPC report noted that half of all Americans age 62 and older are "home rich, cash poor," meaning at least half of their net worth is in their home equity. If this describes you, you'll want to explore ways to leverage your home equity in retirement. Possibilities include downsizing, taking out a reverse mortgage, renting out a room or simply planning to pay off the mortgage before you reach retirement age so you can live rent-free.

Challenge 5: Lack of basic knowledge to manage personal finances and prepare for retirement.
The BPC report documents many ways that Americans often lack in their basic understanding of financial issues and appropriate solutions. But they have many sources at their disposal to learn about investing and insurance protections. Workers who participate in work-based savings plans can often enroll in retirement education and financial wellness programs. And a plethora of websites and books can help you grasp basic financial and retirement planning concepts.

Challenge 6: Social Security is at a crossroads.
The BPC report highlights the importance of Social Security: It provides the foundation upon which most Americans build their financial plans. The report summarizes the financial challenges with Social Security and recommends a combination of changes in benefits and taxes to shore up the system. While individuals can't make policy changes to Social Security, they can support leaders who have the courage to suggest necessary repairs to the system.

You can also learn how to optimize your Social Security benefits, which is just one part of your program to learn about basic retirement planning concepts.

Find the time to make a difference
Many people complain they don't have the time to spend on financial and retirement planning. But that's hard to reconcile with the fact that the average American spends three to four hours per day watching TV.

So here's a suggestion: Stop watching your two or three least favorite shows. By doing so, you might free several hours per week. Then spend half of that new-found time learning about financial and retirement planning issues. Devote the other half to doing something enjoyable, such as going for a walk, taking up a hobby or talking with your spouse or friends.

Of course, taking the action steps outlined above won't guarantee a secure retirement. But they're a good start. Let the BPC report serve as a personal wake-up call and checklist for you to improve your future security.

• Steve Vernon

  View all articles by Steve Vernon on CBS MoneyWatch»
  Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

Could the tide be turning on reverse mortgages?

More and more we are hearing from leading wealth management and retirement advisors about the advantages the reverse mortgage product offers. Capitalizing on your largest asset and accessing that equity can make a tremendous difference as life expectancy continues to rise. 

Please take a moment and read this great article regarding the recent trends regarding individual savings for retirement and health care cost as they relate to home equity as a retirement asset. - Melinda


MarketWatch
Published: June 15, 2016 
By AliciaH. Munnell

After decades of skepticism and reports of scandals, the tide appears to be turning on reverse mortgages. The New York Times Business section recently led with a story on the revival of the reverse mortgage. Even more significant, for the first time a commission examining the state of retirement in the United States emphasized the importance of home equity as a retirement asset and identified the reverse mortgage as one of the major ways to tap that equity in retirement.

A reverse mortgage is a mortgage: a loan with the borrower’s home as collateral. But unlike a conventional mortgage, it is designed as a way for homeowners age 62 and over, with substantial home equity, to tap that equity as a source of funds to pay off their existing mortgage, cover bills or health care expenses, or to provide additional retirement income. Unlike conventional mortgages, borrowers are not required to make monthly payments. The loan must be repaid only when the borrower moves or dies. This feature is the key advantage for retirees who need more income: so long as they live in the house, a reverse mortgage does not add a claim on the income they already have.

Accessing home equity will become increasingly important in a world where retirement needs are expanding – people are living longer and face rapidly rising health care costs – and the retirement system is contracting – Social Security replacement rates (benefits as a percentage of pre-retirement earnings) are declining and employer-provided pensions have shifted from defined benefit plans to 401(k)s, which require individuals to bear all of the risks. Reverse mortgages offer a mechanism for tapping home equity for those who want to stay in their home. And for most low- and middle-income households, home equity is their major asset (see Figure)

 Center for Retirement Research

Ron Lieber in the New York Times article noted that reverse mortgages have moved from a product sold on late-night TV by Pat Boone and Henry Winkler to one offered by community bankers across Pennsylvania (and probably many other states). Dollar Bank, which was established in 1855 and makes loans in the Pittsburgh area, has a loan officer dedicated to reverse mortgages and makes about 100 reverse mortgage loans a year. Fulton Bank in Lancaster also signs up 100 customers a year. Both banks try to get customers to come in with their families so everyone knows what it means to tap the equity in the home. The customers who end up taking out the loan appear to be pleased with the product. And the fact that community bankers are offering reverse mortgages is lending respectability to this “much–maligned” but increasingly necessary product.

The necessity of tapping home equity was also recognized by the Commission on Retirement Security and Personal Savings, a panel of experts convened by the Bipartisan Policy Center and chaired by Kent Conrad, a former Democratic U.S. Senator from North Dakota, and Jim Lockhart III, a Republican who had served as Director of the Federal Housing Finance Agency, Principal Deputy Director of Social Security, and Executive Director of the Pension Benefit Guaranty Corporation. The Commission acknowledged that people are not going to have enough money to retire comfortably and that the $12.5 trillion in home equity rivals the $14 trillion in retirement assets. The Commission stated that reverse mortgages can be a good option for some older Americans, proposed ways to strengthen programs that advise consumers on reverse mortgages, and also suggested establishing a small-dollar reverse mortgage that could reduce fees for consumers and risks for taxpayers.

It does seem, at long last, that reverse mortgages are entering mainstream consciousness. And it may be happening just in time to help millions of Americans who will retire with grossly inadequate 401(k) balances to have a decent standard of living when they stop working.

Could Getting a Reverse Mortgage Help You Save Money?

2016 NBC Nightly News reporting that consumer advocates now say that taking out a reverse mortgage could be a smart way to save money during retirement years. The report also states that roughly half of Americans over the age of 55 have little to no retirement savings. 

If you would like more information about a reverse mortgage or a reverse mortgage for purchase call me at 210-493-7332. Melinda Hipp NMLS#21905

Still Have Reverse Mortgage Questions?

Here is a great video answering many questions I get asked going through the application stage with clients. You can find more information on my new updated website http://www.texasreverse.net/

Professional Pointer

Baby Boomers are living longer and are under increasing pressure to prolong & protect their retirement portfolio for as long as possible, and a Reverse Mortgage can help to make that a reality.

Financial planners are increasingly looking at the HECM as a way to establish a stand-by line of credit that both prolongs & protects their client’s assets. When considering this strategy; the features that stand out to savvy financial planners are things like:

Is 2016 the Year for Reverse Mortgages & Financial Advisers?

As each year passes and more Financial Planning Professionals continue to take a closer look at the advantages of the Reverse Mortgage product they are discovering creative reasons to consider it as part of good retirement planning for some seniors. This article points out the trend and what some of the advantages are. - Melinda Hipp

Is 2016 the Year for Reverse Mortgages & Financial Advisers?

January 24th, 2016  | by Jason Oliva Published in Reverse Mortgage

Although reverse mortgages withstood significant changes over the past year, they’ve also gained a few allies in the financial planning sector—several of whom see increasing opportunities for the reverse mortgage and retirement planning worlds to intersect in 2016.

A slew of financial planning research and commentary last year helped add some extra credibility to the reverse mortgage product. Bolstered by new program tweaks and new consumer protections, reverse mortgage press coverage ranged from calling them retirement’s “best bet,” and even “saving grace.”

Aside from RMD coverage, a fair share of the articles touting the benefits of reverse mortgages came from financial advisers, retirement planners and even a Nobel laureate. Such increased attention could even be an early indicator of the shrinking communication gap between the reverse mortgage industry and the financial planning world.

“There are several signs in the air that the world is starting to get a little different,” said Tom Davison, a certified financial planner and special projects coordinator with Summit Financial Strategies, Inc. in Columbus, Ohio.

Davison co-authored a paper last year with Keith Turner, an Ohio-based reverse mortgage adviser with Retirement Funding Solutions, describing the various strategiesin which a reverse mortgage can be used in retirement planning. The paper, which was published in the The Journal of Retirement in November 2015, also detailed the effectiveness of reverse mortgages in helping retirees increase their portfolio longevity and spending horizons over the course of a lengthy retirement.

Davison’s initial interest in reverse mortgages dates back only a couple of years. While he admits he did know a little about the product, it wasn’t until Davison looked at the reverse mortgage line of credit and the growth it could produce decades into the future that he realized there is a “tremendous amount of potential” for the product within the context of retirement planning.

“That was pivotal—realizing the growth of the cash that was available in the line of credit 20-30 years later,” Davison told RMD.

He’s not alone. The line of credit is largely responsible for winning over many planners, advisers, and other experts—one of whom recently changed her mind about reverse mortgages completely.

“We’re seeing an increase and awareness for the use of home equity, including reverse mortgages, in the financial planning industry,” said Jamie Hopkins, associate professor of taxation at The American College of Financial Services in Bryn Mawr, Pennsylvania. “Planners refined to the retirement income planning—that group of planners are now very interested in the effective use of home equity.”

Apart from his professorial role, Hopkins also serves as the co-director of The American College New York Life Center for Retirement Income, and oversees the college’s trademarked Retirement Income Certified Professional (RICP) program. As opposed to the common Certified Financial Planner (CFP) designation, where Hopkins notes very little is taught about the strategic uses of reverse mortgages, the RICP is one of the few designations that actively teaches advisers how to systematically use reverse mortgages in retirement planning.

The RICP also teaches advisers about the most recent updates to the Home Equity Conversion Mortgages. Through the program, Hopkins estimates that two years from now thousands of more people will have learned about reverse mortgages. But simply knowing is simply not enough. Reverse mortgage professionals also need to acquaint themselves with the financial planning community. And that means being able to speak planners’ language.

“The reverse mortgage world needs to start understanding how the retirement income planning world works,” Hopkins said. “Far too often I talk to reverse mortgage specialists and they don’t know how reverse mortgages fit into retirement income planning. There needs to be an understanding on both sides so the industries can have good communication.”

Like many in the general public, financial planners also harbor their own misconceptions of reverse mortgages. But there are opportunities to bridge the knowledge gap in 2016, including the need for more joint research between advisers and originators, Hopkins said—similar to the Davison-Turner efforts mentioned earlier.

Diverse attendee mixes at conferences that invite more advisers to reverse mortgage events (and vice versa) also presents a great opportunity for industry crossover, he added.

While some advisers may have looked into reverse mortgages in the past prior to the most recent series of program changes, and have not yet bothered to revisit them, others may still be turned off as a result of perceived high costs and the loan of last resort reputation, said Wade Pfau, principal and director of retirement research at McLean Asset Management in McLean, Va.

“A fiduciary planner has to look out for the best interests of their clients,” Pfau said. “As a side effect, the best interests of the planner can be served through research that shows how the legacy value of assets can be improved by a reverse mortgage.”

Pfau, who is also professor of retirement income at The American College, serves as a member of the Funding Longevity Task Force, a group of financial planners established in 2013 by reverse mortgage industry veteran Shelley Giordano. One of the major focuses of the Task Force is how the strategic use of home equity can add value to retirement planning. It was through the Task Force, after having attended one of the group’s meetings, that Pfau began to look at reverse mortgages differently.

Last year, he published a paper in the Social Science Research Network titled “Incorporating Home Equity into a Retirement Income Strategy.” In the paper, Pfau highlights six different methods of using a reverse mortgage in retirement planning and how they impact spending and wealth for retirees.

Like much of the recognition from the financial planning community, Pfau’s research emphasizes the effectiveness of using a reverse mortgage line of credit, a feature he says is still widely misunderstood by advisers.

“An issue that nobody understands is how the line of credit is able to grow over time,” Pfau told RMD. “They don’t understand how there can be value.”

Pfau plans to address this issue in a forthcoming piece that will be published in the Journal of Financial Planning this March. That article, he said, will provide simple examples to explain both why the credit line grows and how this feature can be a value to the consumer.

For advisers, reverse mortgages offer a new opportunity for education and a way for them to search for new clients, Pfau said, especially given the recent changes to Social Security that take effect this year.

“Social Security claiming has kind of lost its momentum with the changes to the program last year,” he said. “If I had to predict what the next hot topic is going to be, I’d say reverse mortgages—for advisors to both seek education and use them as a way to drum up interest among potential clients.”

But, considering home equity and Social Security are the cornerstones of many people’s retirement wealth, advisers may no longer be able to plead ignorance on reverse mortgages and how they fit into an effective income planning strategy.

“There is going to be more attention paid to reverse mortgages because home equity and Social Security are the biggest assets for most Americans,” Pfau said. “It’s really in the adviser’s best interest to learn about reverse mortgages and do their due diligence on them.”

Written by Jason Oliva