More on the 4% Rule

Here is the second part of the article, discussing how a reverse loan can extend retirement funds for more years.

“Wagner’s study shows that the 4% rule works well with portfolios that are at least 50% invested in equities, and then shows how the use of a reverse mortgage can be used to “easily create new rules, such as the 6% rule for a 30-year horizon.”

‘Greater utilization of the reverse mortgage gives higher portfolio balances, but necessarily uses up home equity,” Wagner writes. “The six reverse mortgage options give higher overall results across all portfolio equity mixes than just relying on the portfolio as the source of retirement spending.’

The six options Wagner refers to include what he refers to as tenure advances; term loan advances over the spending horizon; term loan first; line of credit draws first; line of credit draws with a fixed threshold and Sacks’ coordinated strategy—all of which are outlined in the study.

Two reverse mortgage strategies dominate, according to Wagner, given the formula of a 63-year-old borrower living in a $450,000 home and having an $800,000 retirement portfolio.

The “term plan first” strategy, he says, would give an 89.4% chance of withdrawing 6% annually over 30 years if the client’s retirement portfolio is invested 70% in equities, compared to 42.8% chance of the client’s portfolio “going it alone” without a reverse mortgage.

Additionally, under the “term plan first” method, a client’s net worth could be $429,500 higher at 15 years, Wagner says.

Original post by Jason Oliva on 12/30/13

I will share the remainder of the article in my next post.

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