Incorporating Home Equity into a Retirement Income Strategy, by Wade Pfau
Wade Pfau’s article Incorporating Home Equity into a Retirement Income Strategy was published in the Journal of Financial Planning in April 2016.
The article’s Executive Summary:
This article explores six different methods for incorporating home equity into a retirement income plan through the use of a reverse mortgage. Generally, strategies that spend the home equity more quickly increase the overall risk for the retirement plan. More upside potential is generated by delaying the need to take distributions from investments, but more downside risk is created because the home equity is used quickly without necessarily being compensated by sufficiently high market returns.
Meanwhile, opening the line of credit at the start of retirement and then delaying its use until the portfolio is depleted creates the most downside protection for the retirement income plan. This strategy allows the line of credit to grow longer, perhaps surpassing the home’s value before it is used, providing a bigger base to continue retirement spending after the portfolio is depleted.
Use of tenure payments or one of the coordinated spending strategies can also be justified as providing a middle ground, balancing the upside potential of using home equity first and the downside protection of using home equity last.
A key theme is that there is great value for clients to open a reverse mortgage line of credit at the earliest possible age.
The article was previously available at SSRN, and was reviewed by Jason Oliva of Reverse Mortgage Daily