Shelley Giordano
MA Founder and Chair Funding Longevity Task Force American College of Financial Services Author, “What’s the Deal with Reverse Mortgages”
Every person who has ever created a budget knows that the more monthly expenses there are, the trickier it is for the paycheck to do its job. This challenge is magnified in retirement. Since you are no longer receiving income from a job, those monthly expenses can represent a very large chunk of your cash flow. Of course, most Americans are moving into retirement with a “paycheck” in the form of a Social Security check, but Social Security was not designed to meet all our spending needs. Because most of us do not participate in a pension program, our extra expenses must be covered by our savings.
For Boomers who are entering retirement with debt, including mortgage debt, meeting those fixed expenses can be difficult. The Boston College Center for Retirement Research reports that over 50 percent of homeowners over age 55, still had mortgages, home equity loans or lines of credit in 2013, compared to only 38 percent in 1998. Making matters worse, the amount of debt carried was also higher in 2013.
Boomers were likely to have bought more expensive houses than their parents, with lower down payments, and they often were comfortable refinancing their original loans to take out equity for other expenses. Yet mortgage debt is one of the most unforgiving of all since it is tied to the home. Making those monthly principal and interest payments is critical to remain in the home and not jeopardize what has already been invested from buying the house. But in retirement, those monthly payments can be a dangerous percentage of the overall nest-egg, especially when the nest-egg is temporarily undervalued in a bear market.
Retirement income experts stress that the longer you are likely to live, the more careful you must be with your nest-egg. Here is another kicker. If you must make payments when the value of your investments is temporarily reduced following a bear market, you will have to spend a greater proportion of your savings just to keep up. Once spent, those investments cannot participate in a market recovery and are gone forever.
Knowing that the FHA-insured reverse mortgage (HECM) has been steadily improved, Wade Pfau, Ph.D., CFA and Professor of Retirement Income at the American College of Financial Services, evaluated replacing a traditional mortgage with a HECM. Since there is no required monthly principal and interest with the HECM, he studied what the effect of fewer monthly obligations would be on the sustainability of a retirement income portfolio. Dr. Pfau demonstrated that there is value in using a HECM to refinance your mortgage, especially if you can continue to make voluntary payments in years that your investments are providing positive returns. For many, replacing the mortgage with a HECM will give you the flexibility to manage your monthly expenses but still allow you to make payments if you want. The result is that you can conserve your retirement nest-egg and make it last throughout your retirement, allowing you to live a more financially secure life. Coordinating your housing wealth with your other assets through a reverse mortgage can strengthen your retirement — and there is peace of mind in that.