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7 Ways to Incorporate Housing Wealth with a Million Dollar Client – Dr. Wade Pfau

My good friend and colleague, Dr. Wade Pfau, conducted a research study using a Monte Carlo simulator 10,000 times to demonstrate the best and worst possible outcomes for a retiree with $1 million in tax-deferred assets, a home value of $500,000 and a 4% annual draw. Below is an explanation of his findings.

(A 25 percent marginal tax bracket was assumed, and the homeowner’s cash needs were adjusted each year for inflation.)



Seven Ways to Incorporate Housing Wealth with a Million Dollar Portfolio

The lowest two lines explained:

  • Ignore/Never Use: The bottom line (dotted) shows those who didn’t use a HECM at all—ever! This option yielded a 39 percent probability of success at the thirty-year.
  • Last Resort: The second line from the bottom (dotted), representing those who established a reverse mortgage only after the savings ran out, yielded a 69 percent probability of success at the thirty-year.

The next best two lines explained:

  • Use First: The third line from the bottom (solid) shows those who established a HECM at the onset of retirement and use it first instead of other savings, and then they used other savings after it ran out. It revealed a 75 percent probability of success.
  • Use Tenure: The fourth line from the bottom (solid) shows those who established a HECM at the onset of retirement and converted it into a monthly payment. This allowed them to draw less from their savings and thus preserve them longer. It showed an 80 percent probability of success.

{Read More} Why Open a Reverse Mortgage Before It Is Actually Needed?

The final three lines explained:

All three of the strategies below are based on establishing the HECM line of credit at the onset of retirement and allowing it to grow. The differences between them are regarding when and how exactly to use the ReLOC.

  • Sacks and Sacks Coordination/Set it, Get  It,  and  Keep  It: The third line from the top (solid) showed setting up the ReLOC and using it versus the savings during a bear market with the proceeds not being repaid. This method, favored by Dr. Barry Sacks and Dr. Stephen Sacks, produced an 81 percent success probability.
  • Texas Tech Coordination/Set It, Get It, and Repay It: This strategy, shown by the second line from the top (dotted), is similar to Sacks and Sacks, but says that you should use the HECM as income during bear markets and repay during bulls. This method was preferred by the Harold Evensky, CFP—Texas Tech Team and gave an 82 percent success probability.
  • Use Home Equity Last/Set  It  and  Forget  It:  Represented by the solid top line, this strategy says to set up the HECM line of credit and allow it to grow, but only use it after the savings are exhausted. This, in theory, would have allowed it to grow exponentially over that time. Dr. Pfau found that opening the HECM line of credit at the start of retirement and then delaying its use until the portfolio is depleted creates downside protection for the retirement income plan. The result was a nearly 90 percent probability of success at the thirty-year mark.

All three of these final research strategies allow the line of credit to grow larger, perhaps even surpassing the home’s value. This provides a substantially larger reserve fund to draw from should the portfolio be prematurely depleted. The differences in the outcomes were negligible between the three, but the key theme remained: there is great value for clients to open a reverse mortgage line of credit as early as possible.

{Read More} How Did Reverse Mortgages Get Such a Bad Reputation? Nine Observations from Dr. Wade Pfau


Some financial planners will begrudgingly agree to use home equity as a last resort, but as you can see, that has the second-worst outcome. If the client’s primary concern is running out of money and the planner consistently recommends the option with the lowest chance of portfolio survival, then they may not be acting in the best interest of the client.


Don Graves, RICP®, CLTC®, Certified Senior Advisor, CSA®
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®, CLTC®, Certified Senior Advisor, CSA®
Don Graves, RICP®, CLTC®, Certified Senior Advisor, CSA®
Don Graves, RICP®, CLTC®, Certified Senior Advisor, CSA®

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