Reverse Mortgages Get Nod From Financial Planners

reverse mortgages financial plannersOver the past year or so, financial planners and retirement advisers have been taking note of how beneficial reverse mortgages can be as a tool to preserve retirement assets so that folks don’t run out of money during their lifetime.

Last September John Salter, a Texas financial planner and professor at Texas Tech, said “financial planners should re-examine their advice to clients about reverse mortgages. In the past, financial planners have not been enthusiastic about recommending reverse mortgages, mainly because of the costs associated with the loans.”

Financial Planners Rethink Value of Reverse Mortgages

It’s been interesting to watch how this particular group of professionals has done almost a complete about face regarding their opinion of reverse mortgages. They used to be part of the crowd that said, “reverse mortgages are only for the poor” or “they are a loan of last resort.”

Apparently, reverse mortgages have garnered the attention of the Financial Planning Association, thanks again to John Salter, Ph.D., CFP, AIFA. He, along with Shaun Pfeiffer; and Harold Evensky, CFP, AIF, recently concluded a study called: “Standby Reverse Mortgages: A Risk Management Tool for Retirement Distributions.”

Their study was just published in the Journal of Financial Planning.

Here is the summary from their study:

“Our study considers using an HECM Saver reverse mortgage as a risk management tool in conjunction with a two-bucket investment strategy, coined the standby reverse mortgage strategy (or SRM), in order to increase the probability a client will be able to meet predetermined retirement goals.

The HECM Saver has unique and attractive features including lower cost; a non-cancellable line of credit; the borrower’s control over when, and if, he or she uses the line of credit; and a line that can be paid back at any time without a penalty.

The SRM represents an additional source of readily available cash in a bucket strategy to draw upon when clients’ portfolio values deviate substantially from their expected glidepath (where their portfolio should be relative to their capital needs analysis).

Monte Carlo simulations were performed using real withdrawal rates of 4 percent, 5 percent, and 6 percent; a home value of $250,000; and a portfolio value of $500,000. The SRM strategy was successful through all scenarios.

We find this risk management strategy improves portfolio survival rates by a significant amount. The improvement in survival rates is attributable to the mitigation of the volatility drain—the risk of having to sell investments when depreciated.”

You can read the full study here.

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