Many times, people think of a reverse mortgage as something that people only use as last resort. Once all retirement accounts have been exhausted and all other options have been explored, then it’s time to examine a reverse mortgage, but what if data suggested otherwise? What if the right move is to examine the reverse mortgage early and use it preemptively? Many people who are on the cusp of retiring were not able to save enough for retirement for a multitude of reasons. The inability to save enough for retirement has led many in this group to keep more risk in their portfolios than is recommended in order to make up lost ground. Many of them have made up lost ground with the big gains that most Americans who own stocks have experienced over the last decade. This could all change in a hurry if we are not able to achieve the “soft landing” that the Federal Reserve has been trying to stick. If the Fed can’t thread the needle and we have a significant recession, many who just needed a few more years of work in order to get to full retirement and sock away money in their retirement accounts will face the harsh reality of a 20% to 40% loss in to their nest egg, as well as a layoff. This means that they may have no other option than to tap those retirement accounts a few years early while also selling investments at a loss. This will wreak havoc on the future performance of their retirement accounts. In this scenario, thousands if not millions will not have money at the end of retirement leaving them in a position of dependence. What if this could be stopped? If a person has fully paid for their home or has a low mortgage balance, a federally insured reverse mortgage line of credit with a montly disbursement could be a game changer.
Let’s walk through a scenario. Mary, who is 68 years old went through a divorce 8 years ago. Mary wanted to stay in the family home valued at $400,000. She received a portion of the couples qualified retirement account that came out to be $200,000. She also received half of the couple’s cash savings of which her portion was $30,000. Mary had some really good fortune in that her real-estate nearly doubled to $700,000 over the 8 years since her divorce. She was also able to put back an average of $30,000 per year into her employer sponsored 401k retirement plan with an average return of 10.2%. Her home was worth $700,000 and she had $780,000 in retirement savings when the news came that due a down turn in the commercial lending department where she worked in as an underwriter, she would be laid off. The sector as a whole was in a down turn, so Mary did not feel confident that her plan of working until 70 would come to fruition. Another blow to her plan was that a recession had officially been declared and the stock market was in the midst of a major sell off. Her retirement account was now sitting at $690,000 and seemed to be dropping in value every day. So just as in every tough moment in her life, Mary had to dig deep and find a solution. She applied for social security after her unemployment and severance pay had run its course. She would receive $3,200 per month. She knew that this much alone would not cover her basic monthly expenditures of $5,000 dollars. She was looking at an $1,800 monthly deficit, and the thought of dipping into her retirement account when it was down and still losing money was alarming to her. So, she had a meeting with her advisor to finalize a plan for her. They had spoken once about 6 months earlier. At that time, they did a good bit of fact finding and conversing, but now was the time to start making decisions.
During those 6 months, her advisor David had looked at different options for clients in similar situations. He began to understand how a federally insured reverse mortgage could possibly bridge the gap for certain clients. He called a professional he trusted in the reverse mortgage industry and worked on a potential solution to share with Mary at their next meeting. David fully understood that the impact of sequence of return risk to his client. He knew that taking money out of her account while her investments were down would have a significantly negative impact on the longevity of her retirement savings. So, he asked a trusted professional in the reverse mortgage industry to run a projection for him. He asked for the reverse mortgage to disburse $1,800 per month for three years then stop the disbursement. This would allow for Mary’s portfolio to start recovering from the recession losses before any funds were withdrawn. The reverse mortgage also provided a federally insured open-ended line of credit that would grow over time. This reverse mortgage line of credit would be waiting in the wings in case of an emergency or the inevitable next economic downturn. David was truly amazed at how much longer Mary’s assets would last by not taking withdrawals during a period of negative returns in the market.
If you or a client, friend, or family member would like more specifics about how this strategy could potentially benefit, please do not hesitate to reach out. We have helped many clients in similar situations using the federally insured reverse mortgage. The reverse mortgage loan is our only focus, and we have done over 3,000 of these loans since 1993.