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4 Really Smart Housing Wealth Moves for Retirees in 2019

Volatility and Retirement Income Planning

Market volatility is on the minds of many baby boomers at or nearing retirement, and for good reason. You already know that a significant setback in the market is a dangerous way to begin retirement. A recent article listed four strategies that could make coping with ongoing volatility less stressful in 2019.

Let’s take a look at how Housing Wealth can be incorporated into those strategies.

  • Insulate against interest rate risk
  • Plan for longevity risk
  • Find comfort in liquidity
  • Consider an individual retirement account Roth conversion

Interest Rate Risk

To guard against inflation, advisors have traditionally moved clients into more aggressive allocations measures or inflation-protected securities and annuities etc. Imagine adding a reverse mortgage line of credit (ReLOC) to either strategy.

Establish it early in retirement and allow it to grow for future use down the road. Today’s ReLOC is growing at around 5 percent, and with inflation at 2 to 3 percent today (perhaps averaging 4 percent over time), the HECM line of credit not only gives tremendous growth potential, but is also nearly 3 percent greater than today’s inflation rate. This is a powerful hedge against inflation risk.

Longevity Risk

Running out of savings in retirement is the number one concern of most retirees. If they have made substantial contributions to their retirement portfolio and perhaps delayed taking Social Security, they may be well poised to weather the volatility storm. However, current statistics tell us this is not the case for the average boomer.

How can Housing Wealth help? Let’s compare the retirement outcomes of two couples:

Couple A has $500,000 at the onset of retirement and takes a first-year withdrawal of $27,500. This amount is adjusted each year for inflation, and their advisor has a “reverse mortgage as a last resort” position. In the early years of their retirement, the clients experience some negative returns. This sequence now puts constraint on their portfolio, and by year 24, they have run out of savings. They then establish a HECM and tack on another 7 years of retirement income—bringing them to a 30-year retirement.

Couple B had the same starting point and withdrawal plan. The difference for them is their advisor suggested they do three things to mitigate both sequence risks and market risks:

Step 1: Establish a ReLOC at the onset of retirement. (HECM made $250,000 available.)

Step 2: Don’t withdrawal any money from their retirement portfolio in the year following a negative return.

Step 3: Use a non-correlated asset to supplement the income they would normally draw from their portfolio.

In the years following a negative return, they drew from the ReLOC. By doing this, they eliminated the need to withdraw during a down cycle, thus preventing them from locking in the losses. By implementing this strategy, the clients substantially mitigated the sequence risk and, unlike Couple A, they have not run out of money in year 24. Instead, they have in excess of $1 million 30 years later.

Liquidity Risk

Having access to cash may bring peace of mind to many retirees, but is it optimizing their retirement assets?

Dr. Harold Evensky delivered the keynote address on retirement planning at a summit held at the Wharton School of the University of Pennsylvania. To everyone’s surprise, he concluded his presentation by speaking about how reverse mortgages, particularly the line of credit and its financial planning implications.

I see the reverse mortgage as a risk management tool—not as leverage, not as credit, not as cash flow. It’s unlike a home equity loan; it is non-cancelable, which is what happened during the grand recession. They got canceled. We go from a two-bucket approach to a three-bucket approach, so if we ever get to the point where we can cut down that second bucket from two years to six months—and if we ever use that up—then we would tap into this reverse mortgage. The markets get better; we pay it back again. —Dr. Harold Evensky

Evensky’s premise is stunning in its simplicity. Instead of keeping emergency dollars in reserve where they are not growing, use the ReLOC as the emergency fund and re-purpose those reserve funds for better growth.

Roth Conversion

According to the article, converting a traditional IRA to a Roth IRA during a period of volatility when stock prices are down could lower tax obligations on earnings.  However, the taxes to roll over must be paid upfront. Herein lies the challenge; many people don’t have a viable source to pay the conversion taxes, or they need those funds to live on.

Let’s say the taxes to roll over a $200,000 traditional IRA will be $48,000. Your clients have a few choices regarding the accounts they could draw from. (1) They could pay the taxes out of the  roll over itself. Instead of rolling over $200,000, they roll over $152,000, but then they don’t receive the full benefit of the transaction. (2) They could take it from their existing IRA or other  tax-able accounts. Doing so would mean paying taxes on the IRA distribution as well as incurring the lost opportunity costs from drawing the money early instead of allowing it to continue compounding.

How can Housing Wealth be used to pay the taxes for a Roth IRA conversion? The process is easier than you may think.

Step 1: Calculate their HECM benefit. In this example, the HECM makes a $118,000 line of credit available. www.HECMCalculator.net

Step 2: Pull $48,000 from the ReLOC to pay for the roll over taxes.

Step 3: $92,256 is left in the ReLOC and allowed to continue growing as a reserve fund for future expenses.

Planning Ahead

You may have detected a pattern in these four Housing Wealth strategies: plan ahead. The long-held, outdated view of reverse mortgages as a last resort has been proven false by recent research, and setting up a reverse mortgage line of credit at the onset of retirement has been shown to be a key move in many dynamic Housing Wealth strategies.

As you prepare your clients for a possible volatile market in 2019 (and the years ahead), have you broached the Housing Wealth conversation?  Their home may be the asset that preserves their retirement income and gives them the peace of mind they desire this year.

Don Graves, RICP®

Don Graves, RICP®

President and Chief Conversation Starter at HECM Advisors Group/Institute
Don Graves, RICP® is a Retirement Income Certified Professional and one of the Nation’s Leading Educators on the Emerging Role of Reverse Mortgages in Retirement Income Planning. He is president and founder of the HECM Institute for Housing Wealth Studies and an adjunct professor of Retirement Income at The American College of Financial Services. He has helped tens of thousands of Advisors as well as more than 3,000 personal clients since the year 2000
Don Graves, RICP®
Don Graves, RICP®

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