Frequently asked questions regarding Reverse Mortgages for affluent baby boomers
What is a reverse mortgage and what benefits can it provide for affluent baby boomers?
A Reverse mortgage is a federally insured loan that allows eligible home owners over the age of 62 the ability to convert a portion of their equity into tax free lump sum cash disbursement, line of credit, or monthly payout. A properly structured reverse mortgage can save affluent baby boomers hundreds of thousands of dollars throughout retirement by reducing the unnecessary fees, expenses, taxes and penalties that most affluent baby boomers will be exposed to throughout retirement.
How can I use the money I receive from a reverse mortgage?
There are no restrictions on how the proceeds from a reverse mortgage can be used. Affluent baby boomers use strategic reverse mortgages in the following ways as part of a comprehensive retirement income plan:
- Delay Social Security or pension payments to receive higher future lifetime benefits at age 70.
- Avoid Sequence of returns risk and use tax free proceeds from their reverse mortgage to supplement income during down years.
- To pay the taxes on Roth conversions from their taxable IRA and 401(k) plans.
- Improve cash flows–either by eliminating monthly payments or converting home equity to a series of lifetime (tenure) or period certain income streams.
- Establish a non-correlated guaranteed line of credit that can increase every year, at current rates, as high as 6.735% and could increase as high as 15.48%.
- Eventually, the guaranteed line of credit growth rate could exceed their home’s asset value, which could provide a hedge against decreasing or stagnant real estate prices.
- Line of Credit is a non-callable, permanent provision that is guaranteed by the FHA that can’t be cancelled and doesn’t reset, offering superior call protection to HELOC loans.
- Line of Credit can be drawn out and repaid multiple times throughout retirement providing the affluent baby boomer with ultimate flexibility to access funds throughout retirement.
- Interest is tax deductible and can be used to bulk up tax deductions in any one year.
- Monies from a reverse mortgage do not count toward the provisional income calculations for Social Security taxes or the Adjusted Gross Income levels for Medicare Part B premiums.
- Reverse mortgage can be used to purchase a new home for a fraction of the cost of traditional financing–The Home Equity Conversion Mortgage (HECM) for purchase loan.
How can I qualify for a reverse mortgage?
To qualify for a reverse mortgage a borrower must be at least 62 years old, own a home, and have sufficient equity in that home. A lender will also complete a financial assessment of the borrower.
Will my home qualify for a reverse mortgage?
Single-family homes, 2-4 unit properties (one unit occupied by owner), FHA-approved manufactured homes, HUD approved condominiums, and townhomes are eligible for a reverse mortgage. T
How much money can I get from a reverse mortgage?
The amount will vary borrower to borrower and is based on a few factors including age of the youngest borrower, current interest rates, value of your home, and how much you may owe on an existing mortgage.
What is the maximum loan amount that I can receive?
Jumbo reverse mortgage loans can be received for homes valued up to $6 million dollars.
How can a strategic reverse mortgage be used with my investment portfolio to increase retirement spending?
Recent research on the application of strategic reverse mortgage for affluent baby boomers has shown six unique methods of combining portfolio and reverse mortgage withdrawals that can substantially boost retirement income spending (Pfau, 2016a, 2016b). Barry and Stephen Sacks presented their findings in the Journal of Financial Planning (Sachs and Sachs, 2012) and recently, Barry Sacks and Mary Jo Lafaye (Sacks and Lafaye, 2016) have published additional insights on the strategy that is available here along with their powerpoint slides (sacks-coordinated-strategy-presentation (1))
Most affluent homeowners follow the conventional wisdom of living off of their investment portfolios and will use their home’s equity as a “last resort.” Sacks coordinated strategy is quite simple:
- Don’t withdraw monies out of your investment portfolios after negative years.
- Instead, use the reverse mortgage line of credit to fund lifestyle expenses and avoid sequence of returns risk.
- Pay back the line of credit funds withdrawn in future positive portfolio years.
“When the credit line is used in coordination with the portfolio, instead of as a last resort, it prolongs the life of the portfolio and greatly increases the net worth (and the legacy) of the retiree.” (quote taken from the case study)
Sachs’ case study uses a $500,000 50/50 equity/bond portfolio that starts in 1973 and runs it forward for 30 years with the retiree withdrawing $27,500/year or 5.5% of the portfolio’s value each year and increasing that by 3.5% each year to keep up with inflation. See the chart below:
Note that the retiree who used conventional thinking ran out of money in 1996 with six years to go. Not the type of birthday president most 80 somethings want to have. The retiree who used the strategic reverse mortgage was not only fully funded, but their net estate increased by a whopping $933,764 at the end of the 30 years.
Remember, that this data was taken from one of the most powerful bull markets in history, and highlights the different obstacles and challenges that retirees face once they start withdrawing monies from their portfolio versus simply dollar cost averaging in each year in their savings years. Had you been a “buy and hold” investor during this same time period, and not withdrawn anything, your $500k would have grown to $5.8 million by the end of 1997!
This is a 8.5% compound annual growth rate and illustrates the pitfalls of sequence of return risk. The retiree was only withdrawing 5.5% per year, and the buy an hold portfolio averaged 8.5%, but they still ran out of money because they were forced to withdraw monies to maintain their lifestyle when their portfolio was down in value. This created a double whammy:
- Portfolio was already down in value, so not only did they have to make back what the lost, but they also need to make back the 5.5% withdrawal that they had removed to fund lifestyle expenses.
Do yourself a favor and GET A STRATEGIC REVERSE MORTGAGE while you still can….It is better to have it and not need it than to want it but not be able to get it.
References and other professional research pieces:
Pfau, Wade. 2013. “Lifetime Sequence of Returns Risk.” https://retirementresearcher.com/lifetime-sequence-of-returns-risk/
Pfau, Wade. 2016a. “Incorporating Home Equity into a Retirement Income Strategy.” Journal of Financial Planning 29 (4): 41–49.
Pfau, Wade. 2016b. “The Retirement Researchers Guide: Reverse Mortgages” Forthcoming book.
Sacks, Barry H., and Stephen R. Sacks. 2012. “Reversing the Conventional Wisdom: Using Home Equity to Supplement Retirement Income.” Journal of Financial Planning 25(2): 43-52
Sacks, Barry, and Mary Jo Lafaye. 2016. “Case Study.” In Giordano, Shelley. 2016 “An Alternative Asset to Buffer Sequence-of-Return Risk in Retirement.” The Retirement Management Journal, 6(1): 17-26.