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How Advisors Are Using Housing Wealth To Create Longevity Bridges

This Could Be the Easiest Strategy Your Clients Have Even Seen

One Really Simple Change

Today I had an advisor ask my thoughts about his clients using a HECM Exchange to create better retirement efficiencies. The clients were ages 65 and 70 with around $900,000 in savings. Based on their current lifestyle, the advisor completed a series of calculations that revealed that their probability of retirement income success could be increased by more than 20% if they simply eliminated their large monthly mortgage payment.

They had a modest home worth $340,000 but owed $223,500.  The HECM Calculator revealed that there would be a shortfall of around $60,000 that they would personally need to make up the difference. (though many lenders will give a credit to offset some of this). So they, along with their advisor determined that it would be worthwhile to pull funds out of savings (preferably non qualified funds like a non performing CD) to cover the shortfall, and eliminate their existing mandatory monthly mortgage payment.

Supersizing Retirement

I agreed with the metrics and wisdom, but suggested that if they could afford to make a much smaller monthly payment for a few years, they could see something even better!  Why keeping your mortgage payment while changing your mortgage partner could be the latest retirement income game changer. My last Article Creating Income When You Need it Most; A Simple Strategy for Managing the Most Vulnerable Stages in Retirement outlined how simple and powerful this is to accomplish. Let’s look at this weeks couple.

How It Works:

  • The client chooses to do a HECM Exchange with a Qualified HECM Retirement Income Specialist
  • Because the HECM does not make enough money available to pay off the traditionally amortizing loan ..
  • The client will need to bring  between $50,000 – $60,000 from Savings to make up the shortfall
  • Preferably using under-performing Non-qualified funds.  (Think CD/Money Market at low %)
  • The client THEN begins to make a $1,500 monthly payment for the next 15 years on the HECM
  • Though they can choose to pay for a shorter period of time, it’s just that the longer they pay the bigger the benefit (see below)
  • They payment amount and time it’s paid is 100% voluntary and flexible
  • One month they pay more, pay less or don’t pay at all
  • They can use RMD’s or Tax Returns  or any number of ways to make a payment
  • But make no mistake, making a payment with a HECM creates a Powerful Longevity Bridge as well and several other uses

Where’s The Magic:

It is understood that every client will not be able or willing to make a monthly payment. But for those who can, look at what happens:

  • For every dollar they pay towards the HECM, the outstanding loan balance decreases (RED LINE)
  • For every dollar they pay, the Reverse Mortgage Line of Credit (ReLOC) grows (GREEN LINE)
  • The ReLOC is compounding currently at close to 6%
  • If you forgot how the ReLOC Works See: {How Does the HECM Line of Credit Work?}
  •  At some point it is even possible that the ReLOC could surpass the Homes Value (BLUE LINE), Thus providing a type of Equity Insurance
  • This appreciation of the ReLOC is Tax Free and its not counted as income
  • The funds that are withdrawn come out as Tax Free as well

Here’s the Math

  • Notice below how fast the voluntary payment replenished what was used from savings…by the end of year 3
  • This strategy uses the powerful and underutilized power of the 6% tax free growth factor of the ReLOC
  • Remember how much the CD/Money Market were achieving!!
  • The ReLOC now can grow exponentially: $266,721 in year 10 |$644,177 in year 20 |$1,204,523 in year 30

Perhaps it’s the fact that my family is from Kentucky, but this does make sense right?

Retirement may last a long time, most boomers don’t have enough money saved and the vast majority have not planned for the two biggest unexpected expenses (1) Out of Pocket Medical Costs and (2) Long Term Care Costs. Those two are easily predicted to be $250,000 – $1 Mil in unplanned costs.

Having your client create a standby ReLOC by continuing to make a monthly payment could make sense.  At least enough sense that it should be part of the conversation. Let me know your thoughts in the comments section below – dg

From the Video Archives @2013

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

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

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

Categories: Advisors, Financial

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