Wade Pfau: Retirement Planning Should Include Reverse Mortgages

Advisors and others are overlooking advantages reverse mortgages can provide, experts said at a recent summit.  

More advisors should closely look at how much housing investment makes sense and include reverse mortgages in comprehensive financial plans, experts said.

“My first big message is that we need to expand the scope of planning and include housing wealth in it. Reverse mortgages are certainly part of the picture,” said Anna Rappaport, an actuary and internationally recognized expert on retirement. She made the comments during the panel “Financing the Second Half of Life: Leveraging Housing Assets and Reverse Mortgages’’ at the 2021 Century Summit presented by the Longevity Project in collaboration with Stanford Center on Longevity.

For most people, their home represents 70% of their assets, Rappaport said. She questioned whether that percentage is too high. For example, how much money should a younger person invest in a house vs. saving in a 401(k) plan or other retirement vehicle? Should so much of a person’s wealth be concentrated in a home as they head into retirement?

Retirees need an integrated income plan, Rappaport continued. As part of that, they need to look at whether they should pay off their house or refinance. They also need to consider how they will pay for emergencies and to think about whether using home equity is a way to pay for long-term care, she added.

Moderator Richard Eisenberg, managing editor of Next Avenue, said reverse mortgages need to overcome public and professional resistance. They’ve been called “the last resort’’ by some financial advisors, and have a history of high fees and unscrupulous lenders.

Eisenberg said about 1% of eligible households hold a reverse mortgage in the U.S. “People need to be convinced that they are smart and safe and a good use of their money,’’ he said.

Strategic Coordination

Wade D. Pfau, professor of retirement income at the American College of Financial Services, said reverse mortgages are not just for retired homeowners. “It can be valuable to open up in advance and to strategically coordinate that tool with the investment assets throughout retirement,’’ Pfau said.

He noted homes are a large, undiversified asset and retirees may not see as much housing appreciation as national trends may imply. As a result, it’s not necessarily efficient to wait until late in retirement to consider a reverse mortgage, he added.

“By opening it sooner, there’s a line of credit that can be attached to it that grows throughout retirement and in a low interest-rate environment that retirees face today. That can really facilitate having a better outcome by opening that line of credit earlier. And then strategically thinking about, when do I want to spend from my investment assets along with Social Security and other things? When do I want to spend from the home equity? And can I be more thoughtful about how I can coordinate those together to get a better retirement outcome? So don’t necessarily leave the home as the last resort, but think about how you can thoughtfully use it throughout the retirement,’’ Pfau said.

Panelist Craig Lemoine, CFP, executive director of the Academy for Home Equity in Financial Planning at the University of Illinois, said financial professionals are becoming more willing to recommend a reverse mortgage for cash flow.

However, Lemoine said, the academy surveyed 500 financial planners, advisors and brokers and found compliance departments often limit conversations on what they can say about mortgages and debt refinancing.

A Different Kind of Debt

Pfau said reticence about reverse mortgages can be changed.

“It’s a debt that works very differently from other debts. Because there is no fixed repayment schedule, the repayment is pushed back to the end. And it’s a nonrecourse loan so that if for whatever reason the loan balance grew to be worth more than the home is, the heirs would not be on the hook to pay more than that. It provides you a way to spend home equity in the same way that you spend from an investment portfolio,’’ Pfau said.

“I think helping people to understand the psychology of that is important,” he added. “If there’s a market downturn and you’re spending from an investment portfolio, you have to sell more shares of what’s left and then your portfolio digs a hole that even if the market recovers subsequently, it’s difficult for your portfolio to have that recovery because you’ve permanently lost assets in that portfolio.”

Pfau said when a portfolio loses value, a reverse mortgage is “a buffer asset available to temporarily spend funds to help bridge that portfolio for you, so that you’re not having to sell from it when it’s losing value.’’

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