Facilitating Retirement through Reverse Mortgages

April 17, 2009 | Leave a Comment

April 17, 2009
Facilitating retirement through reverse mortgages
By Robert Ledman
As we help our clients plan for retirement, a common goal we all share is to understand the big picture: How the clients see themselves in retirement.
This covers what they want to do (travel, new cars, medical etc.), what their cost of living will be, whether they will work part-time or advise and what they want at the end of life the full picture of a client’s retirement ideal is the basis from which we should all start.
We as professional figure out how much is going to take, what they currently have, the time value of that amount and what funds will be left in the end.
One statement I often hear is, “I’m going to spend it all and enjoy what I’ve earned.” What the client really means to say is, “I have worked hard to save all of this money and I don’t want to run out of it.” So, if our clients are truly going to spend it all, we can help them do so – wisely.
One option that is often overlooked is the use of reverse mortgages for retirement purposes. If you have a client who is about to retire at 64 and you’re looking at the big picture, why is the house overlooked and the mortgage payment simply factored into the expense portion of the scenario? Since many homeowners out there still have a mortgage on that $250,000-$650,000 house, you can figure they are paying $1,000 – $2,500 (or more) per month on their mortgage alone. What does that cost them each year?
Let’s look at a sample scenario. The owner of a home valued at $350,000 still owes a bit on their mortgage and is planning to pay $1,000 per month for 10 more years. That means the homeowner will pay at least $12,000 per year. If they’re paying from their retirement account, you then have to add in the taxation on withdrawals. Let’s assume in this case that the client would need to withdraw roughly $16,200 per year (pre-tax) just to make house payments. What if they could leave that $16,200 in their retirement account to continue accumulating? Over the course of a 10-year period, that adds up to a significant amount of money. And, as their advisor, you have just extended their nest egg for quite a few more years. Plus, reverse mortgages do not lend the full amount of the home’s value, so assuming the homeowner doesn’t live to age 100 – and the property value doesn’t decrease substantially – there will still be equity left in the house for the heirs (probably even more since most property tends to appreciate over time). By eliminating the monthly mortgage payment, the client has more of their hard-earned money accessible to them each month. With the funds they would otherwise be taking out of the retirement account to pay bills, they can travel, visit the grandkids, invest, and purchase the products you sell.
The biggest obstacle to investing in the products you sell is that the vast majority of seniors say (according to the polls out there) they don’t know if they have enough money to get them through retirement. This is where your expertise and big-picture planning makes a difference. Many homeowners understand the need for long term care and want it, but their uncertainty about future funds makes them hesitant to withdraw any more than is needed from their retirement accounts. For a client like this, a reverse mortgage is great. They can purchase long term care insurance (LTCI) for less than they would be spending on their mortgage and save the excess (or spend it as they choose). So for those of you who sell LTCI, when your client will not commit to the sale because of the cost, try looking at a reverse mortgage – especially if they have a current mortgage payment.
Another objection to the reverse mortgage strategy is that it essentially depreciates the value of the house. This may be true, but at what cost? The children’s inheritance? If the client wants to leave money for the heirs, dollar for dollar, they can’t beat life insurance. The homeowner can purchase more life insurance than the house is probably worth and, most likely, the children are more interested in the money than living in the home anyway. The heirs also get any remaining home equity plus any equity generated from the appreciation of the home over time. So, didn’t you just do more than what your client asked you to do; make sure there is enough for them and protect the kids?
Of course, part of our due diligence as financial professionals is to assess whether a reverse mortgage is right for our client. We need to ask if they are planning to stay in their home or if they plan to move closer to the grandkids. Have they thought about downsizing? If insurance is part of the plan, are they insurable? As long as we do our part to protect our clients, they will continue to trust our advice.

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