“Can I take out a Reverse Mortgage and invest that money?” asked a Time Magazine Reader a couple years ago (read full article HERE). The short answer is yes…if your Advisor wants to get fitted for a new ankle bracelet by the federal government. (I hear they can get itchy after a while.) Here was the actual question:
“Dear Time Magazine, can I take out a Reverse Mortgage and invest that money in an account that would pay a decent rate of return? My home is paid off and the equity is just sitting there drawing no return. If repay the loan in 10 or 20 years with the money I invested, would I come out ahead?” – Stan L.
“Dear Stan, in theory it sounds good, but to get the kind of return you’d need to make it worth doing. You’d have to take on a fair amount of risk. “You don’t want to gamble with your home equity,” says Tom Mingone, founder and managing partner of Capital Management Group of New York.”
Here’s the Long Answer
Dear Stan, Did Your Advisor Suggest This Strategy?
If so, I would strongly consider getting another advisor. In the olden days–as this 2005 Wall street Journal article, “Taking Out a Mortgage To Buy Stocks Isn’t Quite As Crazy as It Sounds,” implies–the strategy may have been reasonable to some investors (Buffet, Gates, etc.), but for the average retired, or soon to be retired investor, this strategy has always been bad news. This is especially true, if Housing Wealth represents a substantial part of your wealth. Taking money out of a asset that can lose value (i.e. 2008 housing crash) and putting into something that can lose value (i.e. 2008 market crash) puts your entire retirement at risk.
Since 2008, I don’t know any advisor who would dare recommend a strategy like this. So as I said earlier, if they did, please consider expanding your options.
Have You Considered the Merits of a Reverse Mortgage (HECM) Standby Line of Credit?
Here is a safe way for you to convert around 40% of your home’s equity and turn it into a Line of Credit, but with some considerable differences. Let me outline just a few:
- It has a built-in, guaranteed Cost of Living adjustment. Should you qualify, a HECM Line of Credit has a guaranteed growth rate (see video) regardless of the home’s value. You can turn a $500,000 home into a $200,000 Line of Credit with a minimum growth rate today of 5%.
- It cannot be frozen, canceled or reduced.
- It can be repaid. Some people treat it as a revolving Line of Credit. Repaying it from others resources or even RMDs that they did not need to use.
Dear Stan’s Advisor, Here’s an Outside-of-the-Box Idea.
I’m hoping Stan came up with that idea all on his own. However, I’m often asked by advisors, like yourself, how they benefit from their clients considering a Reverse Mortgage. Here are 4 ways your practice can benefit all while remaining legal, moral, and ethical:
- The Money You Manage
There are several strategies for implementing Reverse Mortgages that can help prevent premature erosion of the retirement portfolio. According to researchers, one of the most efficient ways to use a Reverse Mortgage is to mitigate sequence of return risk–using the Reverse Mortgage as income during down years to give the portfolio time to recover.
- The Products You Sell
Reverse Mortgages can free up money for retirees to purchase life insurance or long term care. Recent research indicates nearly 70% of Boomers will need long term care at some point in their lives, and estimates place the cost at $130,000. Most retirees don’t have money put aside for this expense.
- The Clients You Keep
Competition among advisors is fierce, and client attrition can pose as a danger even for the most experienced advisor. Starting the Home Equity conversation with your clients can differentiate you as the creative and innovative advisor you are. Your clients will be satisfied…
- The People They (the clients) Tell
And if your clients are satisfied, they’ll share their retirement success story with their friends and family. Only 16% of Baby Boomers have a written financial plan. Opportunity is ripe for advisors to serve this aging population by helping them to optimize their retirement income plans.
Most retirees and prudent advisors believe that a Standby HECM Line of Credit is the best use of housing wealth happening today. It’s safe, easily accessible, cannot be lost and has guaranteed growth. That truly in a win/win.