FPA San Francisco Newsletter
Rick San Vicente, VP NW Sales Leader, Mutual of Omaha Mortgage
with
Shelley Giordano, Academy of Home Equity in Financial Planning, University of Illinois
The famous physicist Werner Heisenberg reportedly mused that when he gets to Heaven, he hopes that “turbulence” can be at last be explained to him. Tongue-in-cheek, Heisenberg claimed that even the theory of relativity would be easier to grasp than the tendency of things to change in unpredictable ways. For retirees in midst of the Covid-19, the volatility in investments, especially in March 2020, was a reminder that retirement planning is fraught with the need to make assumptions that may or may not provide for a secure future.
Wade Pfau, PhD, CFA, Professor of Retirement Income at the American College of Financial Services, writes that market turbulence, longevity, and spending shocks are the three major threats to financial security in retirement. To mitigate these risks, Dr. Pfau recommends that the advisor integrate the housing asset into the planning process. Dr. Pfau’s approach is to treat the home as a “buffer asset” that may be deployed to protect the investments should the client live long, encounter unexpected expenses, or even temporarily need an alternative source of cash to avoid selling in a bear market.
With an estimated $7 trillion in senior home equity, would turning this dead asset into a integrated strategy for your clients help restore peace of mind, especially in view of the economic and health consequences that retirement in the Covid-19 world may bring?
The most dramatic use of the reverse mortgage, and the most popular, is to convert a traditional mortgage into a reverse. This immediately removes the dreaded monthly mortgage payment and gives clients breathing room to enjoy life.
Retirees are often surprised that dental, vision aid, and hearing aid are not only not covered by Medicare but also that they are so expensive. Possible long-term care needs just add to the uncertainty of what the future will cost.
And finally, clients are anxious about their investments lasting as long as they do. Having to take distributions in a down market is unsettling enough that even Congress in the 2020 CARES ACT suspended RMDs. Selling in down markets is known as “Sequence of Returns Risk. “Clients just know it as buying high and selling low.
A reverse mortgage line of credit can be used as substitute draws while the market recovers. The modern reverse mortgage, or Home Equity Conversion Mortgage (HECM), is FHA-insured and provides for growing access to borrowing power as the client ages. Although the HECM line of credit is similar to a home equity line of credit, there are critical differences. When there is turbulence in the financial markets, lenders can substantially alter their commitment to lend on home equity. This was a painful lesson in the Great Recession. Just when clients needed liquidity, the banks did, too, and stopped lending. Already we have seen Chase and Wells Fargo suspend HELOCs during the Covid-19 pandemic.
But clients who have a reverse mortgage line of credit cannot be denied access to their growing line. As opposed to a HELOC, the HECM line of credit cannot be
Cancelled
Frozen
Reduced
Substituting draws from invested funds with draws on a reverse mortgage puts the house to work in a particularly effective way. To prepare for the unexpected, the house is an important part of the retirement planning process.