Reversing attitudes on reverse mortgages…

Reverse mortgage not just a ‘last resort’

How blending product with other investments can boost retirement income

By Tom Kelly, Inman News, Wednesday, April 18, 2012, link

<a href="" target=blank>Money image</a> via Shutterstock.Money image via Shutterstock.

The number of Americans 65 and older who continue to work  has risen in the past decade. The unexpected rise can be traced to a variety of  factors, including shell-shocked retirement accounts, falling interest rates on  savings tools, fewer company pension plans, and the inability to save.Many of these people have raced to take part-time  employment, and baseball spring-training facilities are a prime example. There  were seniors selling tickets, programs, hot dogs and popcorn, plus acting as  ushers and parking lot directors in nearly all of the recently completed Cactus  and Grapefruit League games.

The goal of this age cohort is to supplement their Social  Security payments and portfolio securities (such as 401(k) and individual  retirement accounts) so that they won’t run out of money before they die. What  other sources might be available?

Barry H. Sachs, a real estate tax attorney in San Francisco, and Stephen R. Sachs, professor emeritus in  economics at the University   of Connecticut,  researched ways to further enhance a senior’s finances by adding home equity  via a reverse mortgage. In a recently published study, the authors found that a  reverse mortgage can be powerful tool when used within a coordinated strategy  rather than a “last resort” after exhausting the securities  portfolio.

The model shows that the retiree’s residual net worth  (portfolio plus home equity) after 30 years is about twice as likely to be  greater when an active strategy is used than when a conventional strategy is  used.

“It’s so important that financial planners have begun  to ask the question about what’s possible with reverse mortgages,” said  Martin J. Taylor, president of Bellevue, Wash.-based Stay In-Home, a reverse  mortgage lender. “While they have often been known for solving desperate  situations, they have a variety of uses in long-term financial planning.”

What Sachs and Sachs have done is to compare three  strategies for the use of home equity via a reverse mortgage to increase the  safe maximum initial rate of retirement income withdrawals. The commonly  accepted “safemax” begins with a first year’s withdrawal equal to  4-4.25 percent of the initial portfolio value. Subsequent years’ withdrawals  then continue at the same dollar amount each year, adjusted only for inflation.  Since many retirees have found the safemax uncomfortably limiting, Sachs and  Sachs calculated greater percentages in some examples.

The strategies:

(1) The conventional, passive strategy of using the reverse  mortgage as a last resort after exhausting the securities portfolio.

(2) A coordinated strategy under which the credit line is  drawn upon according to a formula designed to maximize portfolio recovery after  negative investment returns.

(3) Drawing upon the reverse mortgage credit line first,  until exhausted.

The authors found “substantial increases” in the  cash flow survival probability when the active strategies are used as compared  with the results when the conventional strategy is used. For example, the  30-year cash flow survival probability for an initial withdrawal rate of 6  percent is only 55 percent when the conventional strategy is used, but is close  to 90 percent when the coordinated strategy is used.

So, how is the reverse mortgage best blended together with  other investments? In a nutshell, it’s a basic algorithm:

At the end of each year, the investment performance of the  account during that year is determined. If the performance was positive, the  next year’s income withdrawal is from the account. If the performance was  negative, the next year’s income withdrawal is from the reverse mortgage credit  line.

According to the study, this spares the account any drain  when it is down because of its investment performance. It also leaves the  account more assets to recover in subsequent up years. This is done in the  early years of retirement, so the account grows before the reverse mortgage  credit line is exhausted.

The authors emphasize that a reverse mortgage is not  necessarily a useful vehicle for every retiree who has substantial home equity.  A retiree whose primary source of retirement income is a securities portfolio  and who also has substantial home equity must decide early in retirement  whether to live within the safemax limit set by his or her portfolio. This  decision is a fundamental component of overall retirement planning.

Author: kimhuntkw

We specialize in Real Estate in the Pleasanton, Dublin and Livermore areas of the East Bay in California

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