There was a very interesting article in Kiplinger’s magazine this past week regarding retirement. The title was “Live Well Without Running Out of Money in Retirement.” Of course it had all the typical successful retirement “do’s”, manage your budget, don’t over withdraw income, watch out for healthcare expenses, guarantee your income, etc.
The fascinating part was at the very end it spoke of utilizing a Reverse Line of credit or Reverse Mortgage during retirement. Fascinating only because its something that the media has rejected for some time and has been a regular part of our planning for many years.
Reverse Lines of Credit are getting tremendous footing in the financial planning community as a viable financial product for those in retirement to protect assets from market downturns and as a way to reduce the risk of a retiree draining their retirement assets throughout retirement.
Matter of fact, Eileen Ambrose and Sandra Block, two of Kiplinger’s senior editors write “Reverse mortgages have often been branded as a way for older retirees to raise money only when other sources of retirement income have dried up,” “But a growing group of financial planners and academics say that taking out a reverse mortgage early in retirement could help protect your retirement income from stock market volatility and significantly reduce the risk that you’ll run out of money.”
A Stand By Line of Credit
The most beneficial strategy using a reverse mortgage is “the standby reverse mortgage.” Also called a Reverse Line of Credit, a retiree opens a reverse line of credit and lets it sit open. When the stock market falls, the line of credit can be utilized to pay day to day expenses until a portfolio recovers. Retirees who follow a strategy like this should be able to “avoid the pitfalls of the Great Recession.” Ambrose and Block write, when many seniors were forced to take money out of depressed portfolios to pay their monthly bills.
It’s bad enough to suffer through a 25% – 35% decline in the stock market, but to continue to take systematic income withdrawals during that time compounds the issue. A reverse line of credit gives the retiree a “bucket” to go to during this time allowing time for the investment account to recoup the losses.
This strategy can be effective, “both from a practical and a behavioral perspective,” says Harold Evensky, a certified financial planner and chairman of Evensky and Katz/Foldes Financial to Kiplinger. “If people know they’ve got resources when the market collapses, they don’t panic and sell.”
Old Way, A Much Less Efficient Home Equity Line of Credit
Most commonly, seniors utilized a HeLOC or Home Equity Line of Credit as a source of emergency cash but you can’t count on the money being there when you need it, says Shelley Giordano, founder of the Academy for Home Equity in Financial Planning at the University of Illinois at Urbana Champaign.
During the 2008–09 financial crisis, many banks either froze or outright closed borrowers’ home-equity lines. That will not happen on a reverse mortgage line of credit, Giordano says.
“As long as you meet the terms of the reverse mortgage—you must maintain your home and pay taxes and insurance—your line of credit is guaranteed,” Ambrose and Block write.
Also adding to the increased attractiveness of reverse mortgages is a currently-beneficial rate climate, the amount of housing wealth that seniors currently maintain, and the fact that an untapped credit line increases as time goes by, according to the writers and Giordano.
What about the Growth Rate Factor?
The most interesting part of the article, in our opinion, is the fact there was no mention of the Growth Rate factor. The Growth Rate Factor is the annual increase amount of the line of credit. Typically, today that growth rate factor can be 5.5% annual growth. So simply if you start a Reverse Line of Credit at 65 for $162,796 by age 85 with no use, the original line has grown to $463,227 of available credit. Whose getting 5.5% guaranteed growth on ANYTHING?
With the looming recession on the horizon and the fact that mortgage interest rates have decreased over 20% over the last 30 days alone, now is a great time to look or re look at the reverse line of credit. Home values / home equity won’t be this high long.
Read the whole story at Kiplinger.
If you have any questions concerning how a reverse line of credit may fit into your retirement goals please give us a call we are here to help. (804) 282-8820.