Can Reverse Mortgages Hedge the Most Common Retirement Income Risks?

This is the title of an article written by Don Graves, RICP, and published by the Society of Financial Services Professionals in January 2017. Click to read the article here: SFSP-Mitigating-Risk-DG.

Don points out retirees have four key concerns called the 4Ls:

  • Longevity: Will I have enough to meet my basic needs?
  • Lifestyle: Will I have enough to get a steak instead of a hamburger?
  • Liquidity: Will I have access to tax-advantaged money for possible spending shocks?
  • Legacy: Will I leave a good financial memory?

A number of financial risks for retirees lurk behind these concerns. Don points out that additional funds from a reverse mortgage can be useful to retirees in many and varied situations. Setting up a reverse mortgage line of credit early in retirement is a sound strategic approach, allowing the line of credit to grow over time, providing the homeowner access to an increasing and substantial amount of cash.

One way to use this growing line of credit is shown in an example from Barry Sacks. It is a simple way to coordinate annual draws from a portfolio and a reverse mortgage line of credit to avoid sequence risk due to down markets early in retirement. Living on the portfolio alone the homeowner runs out of money well before retirement ends. Funding spending from the reverse mortgage line of credit after down markets instead of drawing from the portfolio gives the portfolio a chance to recover. Working through the years in this example the homeowner finishes retirement with $1,000,000 in their investment account, rather than running out early.

Reverse mortgage lines of credit inherently are flexible tools in retirement as they provide access to cash. There are many ways to use them judiciously. This article offers a good place to start thinking about how the line of credit may be used in this and many other retirement scenarios.