Reverse mortgages have received an “undeserved bad reputation” in the past not only among seniors, but financial professionals as well. But as retirees today face longer life expectancies requiring greater financial longevity from their assets, advisers and retirement planners need to open their minds and reexamine the way they look at reverse mortgages, says one respected financial planner.
People are living longer than ever before, but this increased longevity presents a challenging retirement picture. However, financial advisors maintain a dismal view about reverse mortgages, says a recent Advisors Perspective article written by Wade Pfau, Ph.D., CFA, principal and director at McLean Asset Management; and professor of retirement income in the Ph.D. program in financial services and retirement planning at The American College in Bryn Mawr, Penn.
Times have changed, Pfau notes, citing updated regulations to the Home Equity Conversion Mortgage (HECM) program since 2013, specifically those aimed at protecting non-borrowing spouses and ensuring borrowers have sufficient financial resources to continue paying their property taxes and homeowner’s insurance—i.e., the Financial Assessment.
“The thrust of these changes has been to better ensure that reverse mortgages are used responsibly as part of an overall retirement-income strategy rather than simply as a way to fritter away assets in an unsustainable and irresponsible way,” Pfau writes.
Furthermore, even before those critical rule changes took effect, there has been a series of research demonstrating how the responsible use of a reverse mortgage can enhance a retiree’s overall retirement income plan—some of which Pfau has undertaken, himself. Yet today, the financial planning community has still not largely acknowledge the reverse mortgage product as a viable retirement tool, even with this research.
“It is odd that more advisors are not embracing reverse mortgages for clients wishing to stay in their home as reverse mortgages improve the odds for clients to enjoy a greater overall net worth while also supporting a greater financial portfolio for the advisor to manage,” writes Pfau.
Lack of acknowledgement may still be due to old habits and misperceptions regarding reverse mortgages as loans of last resort, without a clear understanding of how the benefits of these products can exceed the costs, Pfau suggests.
“When a household has an investment portfolio and home equity, the strategy that tends to serve as the ‘default’ is to spend down investment assets first and preserve home equity for as long as possible,” he writes.
Various research over the past few years, however, has shown that using a reverse mortgage as an absolute last resort option, to be used only after investment assets have been depleted, is actually counterproductive.
“Initiating the reverse mortgage earlier and then coordinating spending from home equity throughout retirement offers a way to meet spending goals and provide a larger legacy,” Pfau writes. “That is the ultimate goal of retirement-income planning: using assets to allow for more income and/or a larger legacy.”
In a recent article published by The Wall Street Journal, Pfau noted that reverse mortgages may be reaching a “tipping point” at which they will become more predominant, especially as the government continues to strengthen the regulations for these loans and as new research comes to light on how reverse mortgages fit into retirement income planning.
And financial advisors better get familiar with reverse mortgages, Pfau says.
“Clients will be asking about them, and advisors need to be ready to provide an opinion about their use after updating the due diligence for how the reverse mortgage tool has changed in recent years,” he said.
Read the Advisor Perspectives article.
Written by Jason Oliva
