Larry McAnarney - How to Use Reverse Mortgages

How to Use Reverse Mortgages to Secure a Retirement

Presented by: Wade Pfau, Ph.D., CFA, RICP RICP Curriculum Director, Professor of Retirement Income The American College for Financial Services Founder of Retirement Researcher

Reverse mortgages—when used correctly—can provide an added layer of security for retirees by creating flexibility for their assets. Reverse mortgages have been surrounded by negativity. They were often mentioned alongside phrases like “last resort,” “out of money,” and “bad choice.” My attention was drawn to reverse mortgages to give them an in-depth study. I concluded that reverse mortgages are not inherently a bad idea, though they are often misunderstood and not used in a most beneficial way. I realized that reverse mortgages—when used correctly—can provide an added layer of security for retirees and allow them to enjoy retirement more by having greater flexibility for their assets. Opening a reverse mortgage earlier in retirement and using it in a strategic manner is generally more effective that treating a reverse mortgage as a last resort option only to be considered when all else has failed. My overarching interest is in building efficient retirement income plans to support the most spending potential for assets, both during life and as a legacy for the next generation. I demonstrate with case studies how reverse mortgages can contribute to better retirement outcomes in numerous ways for your clients: • Coordinate between spending from the investment portfolio and from the reverse mortgage to better protect investments from market volatility • Avoid the additional burden of fixed mortgage payments in retirement by refinancing a traditional mortgage with a reverse mortgage * • Pay for home renovations to help clients comfortably age in place with the home they love • Build a bridge to support getting the most lifetime value from Social Security benefits • Use the reverse mortgage as an income-tax-free † spending resource to better manage taxable income • Use the growing line of credit ‡ as a protective hedge for your clients’ home value or as a source of reserves to cover unexpected spending needs Reverse mortgages—when used correctly—can provide an added layer of security for retirees by creating flexibility for their assets. Opening a reverse mortgage earlier in retirement and using it in a thoughtful manner is generally more effective than treating it only as a last resort option. Those who understand whether and how to fit a reverse mortgage into their retirement plan will have an important edge in achieving a financially secure retirement. *As with any mortgage, the borrower must meet their loan obligations, keeping current with property taxes, insurance, and maintenance. †Not tax advice. Consult a tax professional. ‡If part of the borrower’s loan is held in a line of credit upon which they may draw, then the unused portion of the line of credit will grow in size each month. The growth rate is equal to the sum of the interest rate plus the annual mortgage insurance premium rate being charged on the borrower’s loan.

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Retirement Income Optimization Plan The starting point to think about retirement income is not just the financial portfolio; it’s everything that the household has available to fund their liabilities in retirement. Retirement financial goals can be described in terms of four Ls: 1. “Lifestyle goals” is making sure your clients meet their overall lifestyle as much as possible for as long as they live. 2. “Longevity” refers to essential expenses, making sure they are covered, and not necessarily reliant on stock market success for as long as one lives. 3. “Liquidity” is having resources available that are not earmarked for any of the other financial goals which provide true liquidity in the sense that they can be spent without offsetting the ability to meet another one of these financial goals. 4. “Legacy” is just the desire to create a legacy. Longevity is fixed expenses; lifestyle is discretionary expenses, liquidity covers contingencies, and legacy covers legacy.

Retirement Income Optimization Map ®

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Key Retirement Risks The key retirement risks we face post retirement are longevity risk (not knowing how long the financial plan needs to last), market volatility and how that is further compounded by the sequence of returns risk, inflation, and personal spending shocks.

Lifetime Sequence of Returns Risk The lifetime sequence of returns risk is about the fact that when your clients start taking distributions, market returns have a bigger impact. If your client is selling from a portfolio when it’s declining in value, they permanently lock in losses. So that even if the market recovers, the portfolio doesn’t get the full recovery. Let’s say I’m investing for 60 years, but it’s the first 30 years I’m saving a percent of my salary every year, retiring year 31, and then enjoy a 30-year long retirement. How important is each year’s market return in explaining my lifetime financial outcomes?

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Early in my career, market returns on how much impact, because I haven’t saved much yet, but by year 30, that’s the most important pre-retirement return because it impacts 30-years’ worth of my savings. Then I retire in year 31 and start taking distributions, which dramatically amplifies the importance of that market return to my life financial outcome. You can see that the retirement outcome, in terms of how much can I sustainably spend in retirement, is determined by what happens in those first 10 to 15 years of retirement; the years 45 to 60 have very little impact. And that’s this idea over a shorter time horizon, as we might say, well, over 30 years the stock market, should do fine, but is it doing fine over these pivotal early retirement years?

50/50 Asset Allocation Inflation-Adjusted Spending

100,000 Monte Carlo Simulations Based on SBBI >Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8 Page 9 Page 10 Page 11 Page 12 Page 13 Page 14 Page 15 Page 16 Page 17 Page 18 Page 19 Page 20 Page 21 Page 22 Page 23 Page 24

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