Is It Wise To Rely on A Reverse Mortgage To Supplement Retirement Income?

Hi Admand,

Would an extra $1,000,000, over a 30 year retirement, be "Wise" to have and make a difference to a Retiree with an initial $500,000 portfolio?

Your question is very timely since Barry Sacks just released his follow up post to the original article in the Journal of Financial Planning where he addresses the same questions about the use of a Reverse Mortgage and Retirement Income.

Unfortunately the "Conventional Wisdom" of using one's Home Equity, via a Reverse Mortgage, has not been widely used or adopted only as a last resort (just like Scott Graves stated in his reply), but these articles and many more articles from the Financial Planning industry are showing that the Reverse Mortgage should be used earlier on in Retirement planning and it would be Very Wise to use a Reverse Mortgage to Supplement or to Preserve their Retirement income.

The data from thousands of simulations are showing that using the Reverse Mortgage at the earliest opportunity, even when not needed as shown in the "Standby Reverse Mortgage" article (see link below) gives the home owners more options as they age and increases the likelihood that they will have enough money for their retirement or a stronger percentage of not running out of money during their life.

I agree with Scott that the use of any strategy, including using one's Home Equity through a Reverse Mortgage, really depends on the person's unique situation and their Financial or Retirement planning needs and goals, but as a Reverse Mortgage Professional I look forward to having more Financial Professionals reach out to their Reverse Mortgage Professionals in their area to get more educated on today's Reverse Mortgage options and how they can be used as an integral part of Retirement Planning versus a financial product of last resort.

Great question Admand and I also look forward to seeing some of the replies. Hopefully we will get home owners to respond as well, but there may not be too many home owners with Reverse Mortgage experience on Alignable.

Here are the most recent links to the follow up data that shows Barry Sacks strategy (the Sacks Coordinated Strategy Presentation) of using the Reverse Mortgage after down years in the financial markets to avoid the adverse sequence of returns.

Again the 30 year time period used in the analysis resulted in an increase to the Estate of just under $1,000,000 versus the Conventional Wisdom that Financial Professionals have traditionally used, like Scott, who stated that it could be used as a last resort.

Increase Retirement Spending by Coordinating Investment Portfolios and Reverse Mortgages: Case Study by Barry Sacks and Mary Jo Lafaye (https://toolsforretirementplanning.com/2016/08/20/... The Original Journal of Financial Planning Article along with the link are included for your review (Reversing the Conventional Wisdom: Using Home Equity to Supplement Retirement Income

https://www.onefpa.org/journal/Pages/Reversing%20t...

Reference to "The Stand By Reverse Mortgage" article and how a Reverse Mortgage can be used as a Risk Management tool for Financial planning is also included for your review: https://www.onefpa.org/journal/Pages/Standby%20Rev...

Thanks for posting the question as well.

--Carlos Camargo

Reverse Mortgage Professional & Branch Manager with Open Mortgage, LLC.

It truly is case by case. It depends. Does the client have an other source of funds? Do they have a large portfolio? Are they diversified? What is the clients plan when the markets turn bearish again because everything that goes up will come down with respect to the stock market. Is the client using social security only? Do they own a business that is generating a profit? So it depends on the individual client. In a perfect world the client should buy two real estate lots and live in one while the other is free and clear. That way, even if the whole world goes to pot, they can live in the tent next door. Of course I am kidding but it is case by case. What if the client had no cash, the home needs work, and their credit score is 465? You can still get the reverse, fix the home, and stay in it. I had one client that did the reverse on his main home, paid off his house completely and used his good credit to buy a second home in Florida. He rents out the home in Florida when he is not there and it created a positive cash flow.

Reverse mortgages are simply another option in the grand scheme of your retirement. A home is not an asset it is an expense but you have to live somewhere. So, as long as you do not want to move and stay in that area I see no problem with it since residential homes have a shelf life of about 30 years before you have to replace the roof, siding, windows, HVAC, Hot water heater, electrical, plumbing and of course the current style or lack thereof. Clients still have to pay taxes and insurance so there is no free lunch. Costs on these loans approach $10K but I urge folks to take low cost on closing and keep the $$ for themselves. Lastly, if the real estate market and stock markets plunge into darkness with valuations crashing you would be sitting pretty watching everyone else in a panic. Each person needs to be in touch with their portfolio manager, CPA and Mortgage consultant to ensure the best direction for their individual net worth.

As a financial advisor, I believe there are no "bad" financial strategies per se. It all depends on the person and the situation. Each strategy has a particular type of person and situation it fits. Where we get in trouble as advisors is when we try to either: 1) fit a person to the wrong strategy for them, or 2) fail to consider all strategies that might be right for a client, regardless of our personal opinions.

Every client is a snowflake, and who knows? A strategy that we never thought we'd consider might be the right one for them.

Personally, I've never helped anyone set up a reverse mortgage. But I have advised clients to consider it as a last resort, after having exhausted all other assets, to keep themselves financially independent at end-of-life.

Thanks for posting this question!

A reverse mortgage should be viewed as a tool of necessity, not one you want to reach for, but one that will do the job if no other tools are available.

Reverse mortgage companies don't 'give' you anything you don't already have, and they are setup to provide you with the smallest slice of what they can get away with at the maximum cost to your beneficiaries. For some people who have no intention of leaving anything to anyone but a charity or some unrelated foundation, it doesn't matter. But if you're trying to leave an inheritance, then expect to take a 40% or more haircut the moment you sign the reverse mortgage papers.