In the past, reverse mortgages were often seen as a need-to-have option among households that hadn’t saved well for retirement and found themselves short on cash flow in their later years. In many cases, financial planners did not advise them, with the reason being that the benefit they offered to most households would not justify the costs. There were also concerns around the safety of reverse mortgages for couples where only one spouse qualified, leaving the non-borrowing spouse lacking options if the borrowing spouse passed away.
As of 2015, all that has changed. Non-borrowing spouse issues have been protected by the federal government, which insures most reverse mortgages, and product changes have not only made the reverse mortgage a safer product, but a more highly recommended one among the financial planning community.
In fact, there has been substantial research over the last few years that shows the benefit of reverse mortgages for households of all types. From certified financial planners to professors of personal finance and financial planning, a great deal of research has been done to show the merits of reverse mortgages.
Here’s some of the essential research:
“Incorporating Home Equity into a Retirement Income Strategy” by Wade Pfau, Ph.D., CFA.
In his research, Pfau, a Professor of Retirement Income in the new PhD program for Financial and Retirement Planning at The American College in Bryn Mawr, Pennsylvania, discusses several methods for how home equity can be used in retirement via a reverse mortgage. He finds taking the reverse mortgage as soon as possible is advisable in order to achieve the highest outcome.
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’s summary states.
“Reversing the Conventional Wisdom: Using Home Equity to Supplement Retirement Income” by Barry H. Sacks, J.D., Ph.D.; and Stephen R. Sacks, Ph.D.
Brothers Barry Sacks and Stephen Sacks bring backgrounds in tax law and economics, respectively, and they teamed up to produce a paper to examine several ways of using home equity via reverse mortgage in order to optimize retirement income withdrawals.
Retirees are better off with the reverse mortgage, they find.
“The essential result shown by our analysis is the substantial increase in cash flow survival probabilities that comes from reversing the conventional wisdom,” they write in their findings. “This result holds true across a wide range of portfolio asset allocations, of home value to account value ratios, and of expected rates, and both with and without the use of [researched] safeguards … “
“Increasing the Sustainable Withdrawal Rate Using the Standby Reverse Mortgage“ by Shaun Pfeiffer, Ph.D; John Salter, Ph.D, CFP, AIFA; and Harold Evensky, CFP, AIF
Financial planners and professors at Texas Tech University, the authors explore the use of a reverse mortgage line of credit as a standby strategy in retirement.
Among their conclusions: today’s interest rate environment makes the use of a reverse mortgage in financial planning strategy even more attractive. In their conclusion, the authors summarize of their findings:
“Together, these findings suggest that the adage of using a reverse mortgage as a last resort could be a huge mistake in a rising interest rate environment where a retiree waits to set up a line of credit in the future. In addition, the current retirement landscape, due to low interest rates, should incentivize the consideration of reverse mortgages in retirement for many financial planners and their clients.”
Additional research is under way and has been published in recent months and years. By and large the findings are the same: households are better off in retirement when they utilize a reverse mortgage as part of their financial plan.
Much of the research is available online and can be accessed for free so that prospective borrowers may take this research to their meetings with financial planners and other retirement professionals.
If you’re interested in how this research may help you plan for retirement, contact a reverse mortgage expert who can provide more information.