November 2015

Under Funded Seniors

Every day 10,000 people are turning age 62 and many of them are underfunded for retirement.   As the “Silver Tsunami” of Boomers begin to retire or attempt to retire, they may not have the funds for their later years and this is a serious national concern, about to take care of this aging population in the next ten years.

Financial Advisers after may years of resistance to the idea of using a Reverse loan as part of retirement planning, are beginning to see the wisdom in utilizing this option to extend the longevity of a retirement portfolio.

The Journal of Retirement recently published an article about how using funds from a Reverse loan is an excellent strategy manage and extend retirement funds and provided three examples of individuals and how a Reverse mortgage could give them a retirement advantage.

My previous two posts cover the first sections of the article and this post will provide the remainder of it.

“The Under Funded Client”

“Lastly, there are under-funded clients—those who may need cash flow immediately and may obtain a reverse mortgage as a last resort only after exhausting all of their other resources. This group’s Monte Carlo success rates are low, perhaps 60% or less.

“These clients may have the greatest need for a reverse mortgage,” the authors write. “However, it can be demonstrated, using Monte Carlo simulation, that under-funded retirees with home equity that is equal to, or greater than, their relatively low level of invested assets can gain a tremendous boost from the use of an RMLOC [reverse mortgage line of credit]. The challenge may be to maintain a strong financial discipline and to use the reverse mortgage judiciously to their greatest long-term advantage.”

An important conclusion of the article is that reverse mortgages can help with a retiree’s three basic concerns: enhancing sustainable spending, serving as an emergency fund, and even boosting estate sizes, according to Davison and Turner.

“Overall, the major positive surprise is the value reverse mortgages can add to the lives of retirees, both those who already look forward to a satisfying retirement and those who are not as well prepared financially but will make it through,” Davison and Turner write. “This bodes well for a country with a rapidly expanding and aging retiree population.”’

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Strategies to Extend Retirement Savings

I shared part of an article in the previous post that discusses a recent paper that was prepared and published about how using money from a Reverse mortgage is a strategy that more Financial Advisers are considering for their older clients.

And of course, each situation is different depending on the age and assets of seniors and their personal concerns.   Most often they are worried about running out of money and not being able to remain in their homes and have the funds to pay for any services they may need in the future.

The article provides three different scenarios for consideration and how a Reverse mortgage might be used in each situation.

New Paper Spells Out Reverse Mortgage Strategies for Financial Planners

“Because reverse mortgages do not offer a one-size-fits-all solution, the authors note that it is useful to think of these products as being used differently by three homeowner profiles: individuals whose retirement plans are well-funding, those whose plans are constrained and others who are under-funded.

Those fitting into the “well-funded” description, the authors note, may use a reverse mortgage line of credit as a standby or emergency fund; their Monte Carlo success rate is high (over 85%), indicating they may rarely face a spending shortfall during retirement.

Meanwhile, constrained clients are those who typically have Social Security or a pension and a “medium-sized” investment portfolio. This group, according to the authors, has a Monte Carlo success rate ranging from 65% – 85%, indicating higher chances they will need to cut future spending due to underperforming financial markets.

“Their plan may have no cushion to absorb unplanned-for events such as higher medical costs or greater longevity,” write Davison and Turner. “Constrained clients may especially benefit from using a reverse mortgage in concert with their investment portfolio or other assets.”’


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Reverse Loan Strategies

A strategy is generally a method that one will use to gain the most benefit in a given situation.   It could be in sports or at work or in a social environment and it certainly is used in war, but here I am referring to a recent article that suggests various strategies in planning retirement.

One is using a Reverse loan to extend money and funds that an older person may have accumulated over their working years.   And a recent “paper” discusses these in regards not only to the aging population but to Financial Advisers as they work with their clients in not only “preserving” their wealth, but how to make it last for their lifetime.

I am going to share a summary of the article and even the summary is quite lengthy for here, so I will share it in four posts.

New Paper Spells Out Reverse Mortgage Strategies for Financial Planners

“A recent paper published in The Journal of Retirement offers a comprehensive catalog of the various strategies in which a reverse mortgage can be used in retirement planning today, detailing the effectiveness of these loans in increasing portfolio longevity and spending power for retirees.”

The article—authored by Tom Davison, a reverse mortgage blogger and financial planning partner emeritus at Summit Financial Strategies, Inc., and Keith Turner, a reverse mortgage advisor with Retirement Funding Solutions—mainly addresses financial planner working with clients who have an interest in reverse mortgages.

In doing so, Davison and Turner frame the paper around a slew of research from established reverse mortgage researchers such as John Salter, Harold Evensky, Shaun Pfeiffer, who have studied the “standby” reverse mortgage line of credit strategy; as well as Wade Pfau and Barry Sacks, whose respective research has also focused on the use of a reverse mortgage line of credit and the synergies it can produce when used as part of a comprehensive retirement planning strategy.

“Today, there is an evolving understanding of reverse mortgages as a valuable financial planning tool,” write Davison and Turner. “Reverse mortgages are now seen as well suited for retirees—not only homeowners who are underfunded and turn to a reverse mortgage as a last resort, but also those who enter retirement well-funded.”’

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Money from Retirement Funds

Most people are completely unprepared to retire because they haven’t planned very well for it or frankly the rescission dug a big hole in their investments.  And it’s amazing to know that 10,000 people a day are turning 62 and in most cases, totally unprepared for retirement and this giant group of Boomers is referred to as the “Silver Tsunami”.

As they age and move into their “Golden Years”, their number one concern is running out of money.   People are living longer and the reality of out-living your savings is frighteningly real.

However, more Financial Advisers are suggesting to their clients to consider using a Stand By Reverse mortgage to extend the longevity of their savings and investments and it’s a very smart move.

The Dallas Morning News featured a column recently that discussed this important strategy for making, money, last.

Here is part 3 of a summary.   The other parts of this article can be found in my previous, 2 posts.

Reverse Mortgage Line of Credit: A ‘Powerful’ Retirement Tool
Posted ByJason OlivaOn October 26, 2015 @ 5:01 pm In News,Retirement,Reverse Mortgage

“In another scenario, Burns notes a couple that recently lost their jobs before they retired. The couple, aged 65 and 67, has $2,000 per month in Social Security benefits; only $70,000 in savings; and own a home worth $200,000.

“If they do nothing, their lifetime consumption will be $20,000 a year in constant purchasing power,” Burns writes. “But if they take out a reverse mortgage line of credit, their lifetime annual consumption will be $25,900 a year. That’s a 29.5 percent increase.”

In a previous column, Burns wrote about what he calls “the thinness of wealth,” specifically about how 80% of all households have more money in home equity than they do in their combined financial assets and retirement accounts.

“Think about that—80 percent,” Burns writes. “It tells us that whether it is a reverse mortgage, downsizing, right-sizing, renting or living in a trailer, our shelter decisions will make the difference between retirement squeeze and retirement comfort.”’

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