In our prior posts, we focused on what a reverse mortgage is, and also what a reverse mortgage is not. For this installment, our goal is for you come away with a good understanding of the variety of ways that a reverse mortgage can play a significant role in a thoughtful, strategic retirement income plan and achieving long-term financial success in retirement.

While each person’s needs may be different as they approach and enter into retirement, reverse mortgage designs provide for a number of benefits to homeowners, and we will touch on the primary ones:

1) Reducing monthly expenses: Research indicates that retired couples age 65-74 spend 30% of their monthly budget on housing expenses alone. While the terms of a reverse mortgage, like any mortgage loan product, require that the borrower continue to pay property taxes and homeowners insurance and properly maintain the property, reverse mortgages eliminate the requirement that the borrower make monthly mortgage payments of interest and principal. Of course, the borrower can, at any time, repay all or part of the principal amount borrowed or refinance the loan to another HECM loan or a traditional forward loan product – it is entirely within the borrower’s discretion.

2) Supplementing Retirement Income: Reverse mortgages provide flexibility for a borrower with significant built-up equity to not only eliminate monthly mortgage payments, but also consider an annuity-like tenure or term payment, or establish a line of credit, which is contractually structured to grow in line with the variable rate of interest of the HECM loan. Importantly, this HECM line of credit, unlike any traditional line of credit, cannot be frozen, eliminated or reduced by the contractual provisions, so long as the borrower remains in the home and continues to abide by the other terms of the reverse mortgage, including payment of property-related insurance, tax and maintenance expenses.

3) Providing a buffer for retirement income to manage sequence of returns risk for an investment portfolio: Retirement income researchers consistently identify a key risk for retirees in managing a successful retirement who rely predominantly on an investment portfolio for their spending needs: sequence of returns risk. Put simply, sequence of returns risk is when in a retiree’s early years of retirement, he or she experiences a significantly declining market, and in order to fund living expenses, takes larger than planned withdrawals from his or her investment portfolio that has declined significantly in value. Even if the market recovers well, the retiree’s investment portfolio has been depleted during this down-market time period given the required out-sized withdrawal rates, resulting in a lower probability that the retiree will meet his or her original financial plans in retirement. Reverse mortgages, and in particular the growing line of credit option, offer a flexible option to act as a “buffer” asset, allowing retirees to fund living expenses from this line of credit during years after their investment portfolio has suffered a significant loss, providing crucial time for their investment portfolio to recover so that retirees can resume sustainable distributions in the future.

4) Provide a bridge to social security, including delaying social security benefits for maximum monthly payments: Social security payments are estimated to make up roughly one-third of the median retiree’s total retirement income, and delaying social security can significantly increase the annual payment to a retiree for the remainder of his or her life. Of course, there may be a well-considered rationale to take social security payments early, such as a person’s expected longevity. However, simply adding 3 years to the time you take social security, from the deemed “full retirement age” of 67 to 70, your social security benefit increases 8% per year, meaning that if you initiate social security benefits at age 70, you receive a full 24% more annually, indexed to inflation, than if you were to have initiated benefits just 3 years earlier! Delaying social security is considered by many to be one of the best risk-adjusted returns available, and social security being perhaps unique in its features as an inflation-adjusted annuity like product for a person’s lifetime. The percentage difference of course is even more dramatic if you compare taking social security early at age 62, versus age 70. Here again, a reverse mortgage can play a key role in providing you supplemental income as a “buffer” asset to bridge the gap for your retirement income needs until you reach age 70 and can initiate your maximum social security benefits.

5) Cover unanticipated costs: Of course, nothing in life is certain, and even the most thoughtful retirement income planning can face unexpected costs along the way that may otherwise require you to take more than you anticipated from your investment portfolio, changing your expected withdrawal rates and negatively impacting your plan, similar to the “sequence of returns” risk we touched on earlier. With a reverse mortgage, and in particular the feature of the growing line of credit, you have that key buffer asset to manage your withdrawal rates from your investment portfolio, and take funds from that line of credit when unexpected expenses like a new roof, a medical need, or other family need arises.

6) Provide funding for home renovations and the costs of in-home care to allow for aging in place: Making home renovations, such as wheelchair accessibility or adding that additional bathroom and shower on the first level, can be key changes to a home that allow for a retiree to age comfortably in their own home. In addition, in-home care is something that every retiree needs to consider and potentially plan for. A reverse mortgage, and again specifically the growing line of credit, can offer that resource to fund those renovations and in-home care options.

7) Provide for additional discretionary income, provided that it is used properly and takes into consideration long-term needs: Finally, a reverse mortgage can be a resource for funding additional discretionary expenses, including experiences that create lasting memories with family and friends, and providing assistance to family, friends and causes that you believe deeply in, to name just a few. Importantly, these types of expenses need to be considered as part of your overall long-term retirement income strategy, but a reverse mortgage can provide that flexibility to make those memories and be there to help others during your lifetime.

Another post with a lot of information, and we have really only touched on these areas where a reverse mortgage can make a meaningful impact on your retirement income and planning goals. We hope this gives you a sense of how a reverse mortgage can be a true strategic asset in achieving your long-term goals in retirement.

In our next installment, we will set a framework for understanding who would qualify for a reverse mortgage. Please click below to continue with this series, and as always, please contact us directly if you have any questions, whether general questions or unique to your circumstances. We are happy to discuss and map out any potential scenarios for you, incorporating a reverse mortgage into your long-term retirement planning.