The ongoing debate over the efficacy of reverse mortgages got a boost recently from a new study published in the Financial Planning Association’s Journal of Financial Planning. It found reverse mortgages can act as a risk mitigation tool for millions of retirees—especially when dealing with sequence of returns.
“Reverse mortgage products have by-and-large been overlooked due to what the study’s authors call ‘outdated perceptions.'”
The study, To Reduce the Risk of Retirement Portfolio Exhaustion: Include Home Equity as a Non-Correlated Asset in the Portfolio, found that retirement strategies that use a reverse mortgage as an alternative source of cash flow to a traditional investment portfolio “hold the greatest benefit for mass affluent Americans—generally defined as those with $100,000 to $1.5 million in investible assets.”
Conducted by Finance of America Reverse (FAR), it added that those who use a reverse mortgage as a buffer asset in down-years stand to reduce their exposure to market volatility by nearly 10 times and could significantly increase their net worth over a 30-year retirement.
It cited the National Reverse Mortgage Lenders Association in noting that homeowners aged 62 and older have amassed more than $10 trillion in housing wealth due to the runup in property values. While some mass-affluent retirees may opt to live off real estate investments, royalty income, dividends, or other passive income streams, for a vast majority, the easiest source will be tapping into home equity via a reverse mortgage.
Additionally, because the proceeds of a reverse mortgage are not taxable, it is likely the most cost-effective alternative income source for most retirees.
Implications for Wealth Management and Reverse Lending
While financial advisors and wealth managers have abided by the Modern Portfolio Theory (MPT) principles of asset allocation and portfolio diversification for over half a century, reverse mortgage products have by and large been overlooked due to what the study’s authors call “outdated perceptions.”
Yet, they suggest that advisors consider including home equity as an asset in retiree portfolios, given their duty to help clients manage and reduce risk.
“These discoveries will have massive implications for the retirement planning community and the advisors of the nearly 20 million mass affluent Americans in the coming years,” Phil Walker, Vice President of Strategic Partnerships and Retirement Strategies at FAR and a co-author of the study, said in a statement. “The results are clear that most mass affluent retirees should have a retirement plan that includes a reverse mortgage strategy from day one, and financial advisors should consider this strategy as a part of their fiduciary responsibility to minimize risk for retirees.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
