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Retirement income flexibility with reverse mortgages

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When I first wrote about reverse mortgages (RMs) several years ago, the responses from advisors were mostly negative: “The products are too complicated and costly” or “Retirees don’t want to tap their home equity because they plan to leave their homes to their kids” were typical objections.

But attitudes have been changing as academics and advisors continue to research RMs’ potential applications. Part of the interest was born out of necessity. During the market pullback in 2008, reverse mortgages — either taken as lump sums or through lines of credit—became an attractive funding alternative versus selling financial assets at depressed prices for clients with large, unplanned cash needs.

An article in the Fall 2015 issue of the Journal of Retirement by Tom Davison and Keith Turner does an excellent job updating readers about the research into RMs and their potential applications. Davison’s blog, Tools for Retirement Planning ( has a link to the full article, which I recommend highly.

I recently asked Davison, who now enjoys what he calls “partner emeritus” status after working with Summit Financial Strategies Inc. in Columbus, Ohio for many years, how retirees might use RMs to enhance their retirement income planning. He cited three broad categories of retiree’s financial preparedness as described in the article: well-funded, constrained and underfunded.

Well-funded funded retirees believe they have sufficient income and assets to ensure a comfortable retirement. A RM line of credit can serve as their emergency fund or to cover large expenses, such as home modifications to allow aging in place.

Constrained retirees can get by but must make lifestyle trade-offs and the article notes that they also may lack a financial cushion for unexpected expenses. Using a reverse mortgage in combination with their investment portfolio and other assets can improve the likelihood their funds will last a lifetime.

“And people that are underfunded, they just need more money to live on,” says Davison. In those cases, a RM, perhaps in the form of regular income payment, could be the lifeline that keeps the retiree out of poverty.

Davison and Turner’s article reviews much of the published research into RMs’ applications and he believes that advisors are becoming more aware of the product’s potential uses and its flexibility.

“One thing that drives my thinking is a fundamental observation that people live a long time,” he says. “We’re talking 20-30 year retirements, 40 years, and inherently you need flexibility in order to deal with that. Stock investments provide flexibility but at risk and this is another way to get flexibility.”

See also:

Finding flexibility with retirement income planning software

Estate planning for elderly clients: weighing the issues

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