New research shows that reverse mortgages are an increasingly intelligent way to augment retirement planning. What role should they play for you?
New studies reveal that reverse mortgages may be far more beneficial than previously thought. Highly respected professors, economists and financial experts now believe that these tools can play an essential role for all retirees. So why haven’t more advisors been recommending them to their clients? When is the right time to access a reverse mortgage? What are the smart first steps to enhancing your plan?
Why More Financial Advisors Haven’t Recommended Reverse Mortgages
Individual homeowners know the dilemma all too well. They simply need more money for retirement. For many the bulk of their net worth is in their homes, and they know that their other assets and investments aren’t providing enough coverage.
MSN Money suggests that in the past advisers have often looked down on these loans as only being for those going into retirement extremely short on funds. Other planners simply haven’t had the financial motivation. After all; most rely on a commission from assets directly under their own management. Some may not even be aware of the major makeover reverse mortgages have received over the last decade. Fortunately this is changing. New data and better understanding of today’s reverse mortgage and credit line options is fueling a complete 180 degree turn in opinion.
The Home Pension – The Data Is In
Experts now believe that we have been looking at the role of housing and home equity all wrong when it comes to retirement and succession planning. Led by Morningstar Investment Management, and its Head of Retirement Research and Senior Research Consultant, we now understand that real estate plays a much larger role in a secure retirement and estate.
Nobel Prize winning economist Robert Merton points out that in other countries they refer to reverse mortgages as a more appropriate ‘Home Pension‘. We have gone from a 40 year work life and 10 year retirement, to a 40 year career and perhaps a 20 to 30 year retirement. At just 20 years Advisor Perspectives points out that we should be saving 33% of our income during working years. For most this number will be far higher considering a longer retirement is becoming more likely. That’s hard when average housing costs in some US metro areas are above 45% of income. MIT and Harvard professor Merton calls this challenge in funding retirement “one of the biggest global issues.” Merton points to reverse mortgages as being “ideally suited” to solving this challenge.
Robert Powell of the Wall Street Journal’s MarketWatch points to new research studies backing up Merton’s statements, and providing more insight into the best strategy for leveraging a ‘home pension’. Professor of retirement income at the American College of Financial Services in PA, Wade Pfau, says “Strategic use of a reverse mortgage can improve retirement outcomes,” and can be used “to protect your retirement income.” Specifically Pfau notes that “Even for wealthier clients, home equity is still a significant asset which should not automatically be lumped into a limiting category of last resort options once all else has failed.”
Incorporating Home Equity into a Retirement Income Strategy
Reverse mortgages can be strategically used to offset any shortcomings of other retirement income sources. Those that suffer down years in their stock and mutual fund accounts can augment income without destroying their nest egg. Or a mix of both reverse mortgage income and yield from other investments can be used to provide a better quality of life during retirement. Summarizing his findings Wade Pfau says “opening the line of credit and the start of retirement and then delaying its use until the portfolio is depleted creates the most downside protection for the retirement-income plan.”
Affording Your Home
Statistics show that 50% of individuals use reverse mortgage proceeds to cover home improvements and maintenance. Many overlook these expenses in retirement planning. Yet, even if you have held a home for 30 years and paid off your original mortgage, you’ll likely need a substantial budget to keep that home livable later in life.
Many Realtors have recently been targeting older homeowners with equity in their homes; encouraging them to list their properties for sale, and downsize. This may be a great service for some, but a reverse mortgage can provide more options. Many retirees would prefer to stay in their family homes and remain independent. Reverse mortgages can provide that option. Proceeds can be used to cover repairs, upgrades, and even in-home healthcare so that homeowners can stay in place, near friends, and have space to entertain the grand kids.
Thanks to flexible lines of credit, and non-recourse status of this loan, this doesn’t have to mean leaving debt behind. In fact; it can aid in leaving a more profitable and easy to manage legacy.