Sixty-four percent of retirees will get at least half of their income from Social Security. The primary source of income for most retirees is in the form of a 401k or IRA, and yet all of them are concerned with the big question:
“Will my retirement funds last?”
The goal of most financial plans is to allow for about 4% of the total needed income to be withdrawn each year for 30 years. But most retirees are finding it difficult to stick to this 4% max as it is rather limiting. Reverse mortgage funding is now being considered a very viable option to extending retirement income or supplementing it. Once considered only a last ditch plan, reverse mortgages can become a part of a full picture strategy.
The Journal of Financial Planning published an article recently looking specifically at managing cash flow during retirement using a reverse mortgage. Overall, their findings where very positive and are summarized here:
They used 3 cash flow strategies in a mock real life situation to determine how likely it is that a person would run out of money in retirement. The first option was to simply use the reverse mortgage as a final option when retirement funds ran out, but they found two strategies that performed significantly better in stretching retirement funding when using a reverse mortgage.
Using a reverse mortgage to supplement retirement income
Option 1: Reverse Mortgage First
Barry Sacks, PhD. and Steven Sacks, PhD. ran a scenario where a reverse mortgage credit line was established at the start of retirement and a 6% credit line draw was made yearly until it was exhausted. After the reverse mortgage funds were used up, then funds from the homeowner’s retirement account were used. This proved to be the most successful strategy for using a reverse mortgage that allowed for 90% likelihood of funds being available for the entire retirement period of 30 years.
Option 2: Coordinated Strategy
This strategy is a bit more complicated as it allows for withdraw of funds on some years and not others based on a mathematical equation. It is also shown to extend the life of the retirement cash flow, but not as significantly as the first option.
Why these reverse mortgage strategies work
In our scenarios, we found the main reasons why these strategies work has to do with the portfolio assets ability to continue to grow while the reverse mortgage funds are being dispersed. Because the 401k or IRA funds aren’t being withdrawn, they are able to continue to grow.
In the first strategy using a reverse mortgage, the credit line income represents a smaller percentage of the portfolio than the typical 4% annual pay out. Additionally, the years that pass during that time are really deducted from the amount of time the retiree will need to pull funds from the 401k/IRA account, which aids in the cash flow longevity.
In the second reverse mortgage strategy, whether or not the Reverse Mortgage Line is used is dependent on how the 401k or IRA accounts performed. If the investments did well, then funds are drawn from it, if not, funds are withdrawn from the Reverse Mortgage line. In this way, the investment funds aren’t withdrawn from during a dip and can recover over the year or subsequent years.
A reverse mortgage is not right for all retirees, and the option(s) should be discussed with your financial advisor. If the retirement funds you will receive are greater than 4% or you are able to comfortably live within those terms, a reverse mortgage strategy may not be the right fit. If however, additional funds are desired and you are wanting to live in your home as long as possible, a reverse mortgage is a financial tool to consider.
It is important to consult with a trusted advisor. As a certified Reverse Mortgage Specialist, I can assist you in understanding any areas of the process you may need to consider as well, including the costs associated. Contact me today to learn more about how to incorporate a reverse mortgage into your retirement strategy.