Reverse Mortgages Result in More Steady & Increased Income in Retirement

In a recent article in the Wall Street Journal, staff writer Jeff Brown quoted Jamie Hopkins, Associate Professor at American College of Financial Services…

“Research has shown that setting up a line of credit as soon as possible, age 62, in order to let it grow and only tapping into the line of credit when needed can substantially improve the long-term sustainability of a retirement-income portfolio, meaning you can make your money last longer”

Traditionally, the thought has been to wait until a reverse mortgage is needed before getting one. As changes in the reverse mortgage product (HECM) and our overall economy have evolved, the case for getting a reverse mortgage earlier in retirement (as young as 62) has become stronger. The key to this strategy is that the reverse mortgage credit line grows over time, at a rate tied to interest rates. Even if the reverse mortgage is not used until later, this credit line is growing and any unused portion can be converted to a substantial monthly income down the road. With inflation and interest rates expected to increase in the future, these credit lines could be particularly valuable. Increases in the reverse mortgage line of credit are typically the going interest rate plus 1.25 point. This means that your line of credit is exceeding interest rate increases.

In addition, retirees will qualify for more while interest rates are still low. The amount available on a reverse mortgage is based on age, value of home and current interest rates. As you get older, generally you can qualify for more, and obviously the higher the home value the more you can access. But what if interest rates rise? You would get access to less. “Now is an exceptionally good time to be considering adding a [reverse-mortgage] credit line to the retirement blueprint,” says Shelley Giordano, chair of the Funding Longevity Task Force at the American College of Financial Services.

This strategy is called an SRM or standby reverse mortgage. It takes advantage of the current low interest rates and will only get better if interest rates rise. The recommendation of the proponents of this strategy is to draw from the reverse mortgage credit line when investments like stock or bonds are down. This provides for a steady income while giving investments time to recover and allowing them to last longer. This strategy was successful in 1000 simulations, while varying key factors like interest rates and investment returns. Not only did an SRM consistently improve the chances of enjoying a steady income longer, but it also produced a larger income along the way.
There were some warnings however. The borrowers must be careful not to overuse the line of credit for non-essentials. Also, sums taken through any reverse mortgage reduce the equity available for other purposes like moving to another property or the inheritance left to children.

However, if you are looking for ways to make sure you have enough income throughout retirement, a SRM may be the perfect fit. To know for sure what a SRM or other reverse mortgage strategy can do for you and your retirement, contact a Landmark Reverse Mortgage Planner for a free consultation.

To read the full article, “New Thinking About Reverse Mortgages”, click here.