For a Home Equity Conversion Mortgage (HECM a.k.a. “reverse mortgage”) to be a successful retirement planning tool, a person must first change the way they think about their house. Many people have an emotional attachment to the house they live in, but if they can remove the emotion from it, and look at it as a monetary asset, then using the equity from it as another part of your larger investment portfolio begins to make a lot more sense. After-all, a large portion of a retirees net worth is tied up in their home, and even if they have a portfolio of other assets, the equity in their house still is often one of the largest single avenues of wealth.  A couple key points to keep in mind are:

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• Both the borrower and their spouse will have the right to live in the house for as long as they live, up to 150 years old for the youngest of the two (as long as they stay current on their property taxes and homeowners insurance, live in the property as their primary residence, and maintain the home), regardless of the balance of the HECM.

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• Nearly all heirs that receive a home from an estate will in fact sell it, and given the option, would generally prefer to receive a cash inheritance instead. 

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• HECM is a non-recourse loan. This means The balance of the HECM cannot be passed onto heirs. The estate is only responsible for the lesser of the HECM balance or the home’s value, whichever again is less. The remaining equity in the home after the loan is satisfied gets passed onto the heirs.

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In order to fully understand how a HECM can work with retirement planning, it is important to have a complete comprehension of how the Line of Credit feature for the HECM works. Click here to visit the “Reverse Line of Credit Page”. Understanding how funds can be accessed and utilized, how the growth feature works, and the costs involved, will be key to making a HECM/reverse mortgage benefit a retirement plan.

 

The majority of clients that utilize a reverse mortgage in their planning, will set up a HECM Line of Credit in the early years of retirement (closer to the age of 62). In fact, the best time to start a reverse mortgage is before they really need it, allowing the most time to take advantage of the growing line of credit. The unused portion of the line of credit will be guaranteed to continue to grow in availability over time and allow the investor more access to cash throughout their retirement. These clients will plan to utilize the funds from their HECM in a variety of ways to give them the highest probability of long-term financial success in their retirement years. One of the biggest advantages to the HECM product is the unlimited flexibility to use the funds any way they choose to best meet their financial and lifestyle goals.

 

Here are a few key uses in retirement planning:

 

WEALTH STRATEGY

 

Using HECM to avoid “Locked-in-Losses” on their retirement portfolio: Most of the investment world is familiar with the term “locking in your loses”. Essentially, this speaks to the fact that when the market is declining, by withdrawing funds from an investment portfolio, they are eliminating the possibility for those funds to rebound and experience growth; essentially, “locking in their losses”. If they draw funds from the HECM line of credit during those periods of market decline instead of drawing from their portfolio, it reduces the risk of having to sell assets at a loss. It also helps in diversification by providing an alternative source of retirement spending after market declines, creating more opportunity for the portfolio to recover.

 

Using HECM to strategically minimize their tax burden: Unlike many sources of retirement income, the money drawn from a HECM Line of Credit is tax free, since it is technically drawing on borrowed funds. Depending on the other products that make up the overall portfolio, and by working with a CPA and financial planner, they may be able to reduce their annual tax lability.

 

Using HECM to delay Social Security Benefits: With today’s current social security rules, if a person is able to delay collecting on your Social Security beyond age 66, they will be able to increase their monthly benefit amount. Click the link to see current benefit amounts by age https://www.ssa.gov/planners/retire/1943-delay.html. Supplementing their income in the early years of retirement with proceeds from the HECM, may allow them to delay collection on their SS and maximize their benefit amounts.

 

Using the growing line of credit as risk-adverse accessible cash: Regardless of what is happening in the current market conditions, the unused portion of the HECM Line of Credit is guaranteed to grow at the same interest rate as the borrowed amounts does. Therefore, receiving a higher interest margin may in fact be more beneficial than a lower interest rate. If a retiree carries a low loan balance, (or pays it down over time), the available funds will continue to grow faster. This growth feature is built into your HECM contract and cannot be removed. Even if the market is declining, or the home values are declining, the available cash will continue to grow through the life of the HECM.

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Using HECM line of credit as a "high yield" savings account: For may people, keeping a small stock-pile of accessible cash is important to them. Most people will let that reserve funding sit in a savings account or money market account to maintain liquidity. The interest rates on these types of accounts, even "high yield" ones are often below 2%, sometimes below 0.25%. Instead of leaving the money sit gaining minimal interest, a client can place that money onto the line of credit, where it has guaranteed to grow access at a higher interest rate, and still remains 100% liquid should they need to access it. 

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RISK STRATEGY

 

Using HECM as a self-funded long-term care insurance: One of the two main concerns for retirees is medical/long-term care cost. About 52% of retirees will end up needing some sort of long-term care. (See link below) One option is to purchase a long-term care insurance plan. The downside to these plans is that the older a person gets, the more expensive they are. The other drawback is that there is a potential of spending tens of thousands of dollars on a long-term care plan that the beneficiary may never need to use. Setting up a HECM line of credit if the client will not/cannot purchase a long-term care policy, allows access to money to fund their care, should they need it, but also allows them to keep those funds in tact should they not need it.

 

Another item that most people haven’t considered is the idea of in-home care, versus being placed in an assisted living facility. The proceeds of the HECM can allow retirees to potentially pay for in-home care, instead of being up-rooted from their homes.

 

Click this link to view some interesting statistics on Long-Term care.

https://www.morningstar.com/articles/879494/75-must-know-statistics-about-long-term-care-2018-edition

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Using HECM to cover the gap in health insurance: Another use involving health care is utilizing the proceeds from the HECM to help cover the deductibles in a retiree’s current health care plans. Those large medical bills can come up surprisingly and can make a big dent in their fixed living expenses and fixed income. By using the HECM to cover those deductibles, they can maintain their monthly budget without affecting the performance of other products in their portfolio.

 

Using HECM’s survivor benefits to ensure housing and supplement income for the surviving spouse: One thing in retirement that is difficult to plan for is the loss of a spouse. On top of the emotional burden this can take, the loss of a spouse can drastically change someone’s financial security. The loss of a spouse can also mean a loss of their social security benefits. There may also be other pension plans or assets that are not passed on. The HECM can accomplish two things in this situation. Firstly, the funds from the reverse can be used to supplement lost income when a spouse passes. And secondly, because of the survivor benefits, the surviving spouse will be allowed to live in the house until they pass away (must maintain their obligations). This will ensure that the surviving spouse will always have a place to live with no mortgage or rent payments. This can be a great peace-of-mind, especially if there is a substantial difference in age between the two.

 

Using HECM as a blanket policy for life’s unknowns: Even if all the other reasons above are not in line with a person’s financial plans, just having the line of credit as a safety net against unexpected expenses can provide a barrier against financial angst. God willing, a client may live in their retirement years for 30+ years, however, a lot can happen over that time that they may not be able to foresee. Some of the more common expenses that can occur may be:

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• Health care/medical bills

• House repair/maintenance (furnace/ac, roofing, driveway, paint, tree trimming, etc.)

• Vehicle repair/replacement

• Family emergencies

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Again, this is why setting up the reverse mortgage in the early years of retirement is much more valuable.  It gives more time for the line of credit to grow and makes the cash readily available at a time of need.

 

In closing, the above-mentioned uses are not all-inclusive, and certainly not an in-depth look at any of these benefits. If you can see potential value in utilizing a HECM in your portfolio, I would love to talk more about your financial goals, and potentially get your financial advisor involved in the conversation as well. I have seen this loan change the lives and the financial stability of many clients.  Call me to take the next step in seeing how the reverse mortgage could make a positive impact on you too!