3 minute read
Buying A New Home With A Reverse Mortgage
3 MustRead
articles on incorporating home equity and reverse mortgages into retirement planning.
As an advisor, you can serve your olderadult clients more fully by being wellinformed about the reverse mortgage product and related findings in reports from retirement experts like Wade Pfau, Ph.D., CFA, and Barry Sacks, Ph.D., J.D.
Key Findings: Housing wealth should be considered in retirement planning. It may be prudent for your client to obtain a reverse mortgage line of credit at the earliest possible age, as it could increase their chances of outliving their savings and leaving a larger legacy to their heirs. Researchers measured this by performing thousands of “Monte Carlo” simulations to test portfolio sustainability when portfolio distributions are coordinated with a reverse mortgage.1
To read the full articles,
Early establishment of a HECM line of credit in a low interest rate environment is shown to consistently provide higher 30-year survival rates than those shown for the last resort strategies.
2 Reversing the Conventional Wisdom: Using Home
Equity to Supplement Retirement Income.3
Retiree’s residual net worth (portfolio plus home equity) after 30 years is about twice as likely to be greater when an active strategy is used than when the conventional strategy is used. Active strategy is using the growing line of credit (L.O.C.) during the stock market down years.
3 Incorporating Home Equity into a Retirement
Income Strategy.4
Strategic use of a reverse mortgage can improve retirement outcomes. The benefits are nonlinear in nature, as they relate to the synergies created by reducing sequence risk for portfolio withdrawals and to the non-recourse aspects of reverse mortgages that can potentially allow a client to spend more than the value of their home. Research has shown:
• If your clients ignore home equity from 25 to 40 years in retirement, their portfolio longevity decreases by half—from 55% to 25%.
• If your clients use home equity first, the probability of success for longevity doubles.
Figure 1: Probability of Success for a 4% Post-Tax Initial Withdrawal Rate ($1 million portfolio, $500,000 home value, 25% marginal tax rate
1 This advertisement does not constitute tax and/or financial advice from Fairway. 2 Shaun A. Pfeiffer, Ph.D., C. Angus Schaal, CFP, and John Salter, Ph.D., CFP, AIFA. “HECM Reverse Mortgages: Now or Last Resort?” Journal of Financial Planning, 2014. www.onefpa.org/journal/pages/may14-HECM-Reverse-Mortgages-Now-or-Last-Resort.aspx 3 https://www.financialplanningassociation.org/article/journal/FEB12-reversing-conventional-wisdom-using-home-equity-supplement-retirement-income 4 Pfau, Wade, Ph.D., CFA. “Incorporating Home Equity into a Retirement Income Strategy.” Journal of Financial Planning, 2016. https://www. onefpa.org/journal/Pages/APR16-Incorporating-Home-Equityinto-a-Retirement-Income-Strategy.aspx
Home equity is poised to play a more critical role in meeting retirement security needs. A retirement crisis looms
1. Lower savings rate with less retirement preparation 2. Fewer pensions and defined benefit plans 3. We are living longer which causes concern of outliving savings 4. Approximately 10,000 people a day turn 62 for the next 20 years and 3,000 of them are still making a mortgage payment
Did You Know?
Baby Boomers now hold about 44 percent of the real estate wealth in this country, the most of any generation since 2001.
Percentage of Total Housing Wealth - Baby Boomers vs. All Other Generations Combined — by Year*
Harness the power of $10 trillion in baby boomer home equity
1 Source: Federal Reserve: Percentage of Real Estate Wealth by Year and Generation. Credit Card Source: https://www.lendingtree.com/credit-cards/credit-card-debtstatistics/. Auto Loans Source: https://www.newyorkfed.org/newsevents/news/research/2022/20220510. Student Loans Source: https://www.newyorkfed.org/newsevents/news/ research/2022/20220510. 401(k) Source: https://www.ici.org/statistical-report/ret_22_q1. Home Equity Source: https://www.prnewswire.com/news-releases/senior-home-equityexceeds-record-10-6-trillion-301533191.html. IRA Assets Source: https://www.ici.org/statistical-report/ret_22_q1
