New research on Reverse Mortgages appeared in the Spring 2016 issue of the Journal of Personal Finance, also found here. The authors are Joe Tomlinson, Shaun Pfeiffer, and John Salter.
The journal’s editors noted: “The use of reverse mortgages as a retirement income tool has been the focus of much research in the past few years, with the past focus being on how to coordinate distributions from a reverse mortgage line of credit and an investment portfolio. This innovative article is the first to more seriously consider how the tenure payment option on a reverse mortgage compares with the use of a single-premium immediate annuity. Given the desire for a guaranteed income stream, this article explores conditions for when a client may be better off using a tenure payment on a reverse mortgage, or using a single-premium income annuity with a portion of assets in the investment portfolio. As well, when an income annuity is used, the article further explores whether to also open a line of credit on a reverse mortgage.”
The article’s abstract: “This study examines the improvements in sustainable retirement income that can be generated by utilizing either of two options under the HECM reverse mortgage program—the tenure option and line of credit (LOC). For comparison, the study also analyzes the impact of utilizing a single-premium immediate annuity (SPIA) to generate retirement income. The base case for these comparisons is a systematic withdrawal plan that does not use reverse mortgage or annuity options. The study also examines the impact of combining reverse mortgage options and SPIAs.
The reverse mortgage tenure option was shown to be particularly attractive, generating more income than a SPIA purchased with the same financial commitment. The LOC option generated less income than tenure with average interest rates remaining level, but came close to tenure under the assumption of future higher rates. Tests were also run with higher stock allocations for the retirement savings and with increases in the amounts of SPIAs purchased. The reverse mortgage options are most attractive for those who do not need to hold onto home equity for either a bequest or late-in-life spending.”
The line of credit option in the study was “Get it Early, Use it Late” if needed, after depleting other resources. Sustainable spending was higher than using the portfolio alone, but not as high as with the tenure option. In Wade Pfau’s recent comparison of Six Strategies for Using Reverse Mortgages “Get it Early, Use it Late” edged out the tenure approach. The two studies have a several differences in methodology and assumptions about parameters such as future returns. The important big picture conclusion from the existing, and growing, body of research is there are several sound strategies for including reverse mortgage resources in retirement income planning which can substantially increase retirement spending and/or generally improve retirement security. Some will provide higher liquidity (access to cash) and options to respond to changing situations during the retirement period, while others may be easier for the homeowner live with or keep track of as they age. Thoughtful reflection on the homeowner’s situation, including ongoing relationship with a financial advisor and/or savvy family members, should lead to a well-chosen outcome.
Categories: HECM, HECM Line of Credit, Retirement Spending, Reverse Mortgage, Sustainable Withdrawals, Tenure
Please recognise that in circumstances involving the health failure of a spouse the equity income of both the line of credit and tenure may be exempt from the spend down provision of Medicaid and is tax free. Also, tenure isn’t reduced at the death of the 1st spouse. It is also possible to make changes in the tenure sum well after the distribution starts including increasing advancing, reducing the income stream. These are attributes not common to a SPIA.
Reverse mortgage proceeds are not “equity income.” They are debt proceeds. The only ways they involve equity is: 1) to reduce it in a subtraction problem where the variables are constantly changing over time and 2) as a lien on the collateral including several binding covenants.
For too long reverse mortgage proceeds have been referred to as income when income has no repayment requirements and its receipt does not increase any balance due on a debt. Reverse mortgage proceeds are subject to pay back and do increase the balance due on a negatively amortizing nonrecourse mortgage. The only party in a reverse mortgage transaction who does not receive income is the borrower.
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