My good friend and retirement-specialist heavyweight, Tom Hegna, shared a story with some very powerful truths relevant to every financial advisor and their clients at or nearing retirement. The original story is from Dick Austin – he contributed to Tom’s book, “Retirement Income Masters: Secrets of the Pros.”
Some friends from the Northeast had always wanted to visit the desert, so they flew to Death Valley, rented a car and headed across the desert. The trip was wonderful! Everyone was having a great time, but suddenly, they noticed a road sign that read, “Next Gas Station 100 Miles” . . . and their gas gauge was rapidly approaching “E.” Their joy quickly turned to anguish, and they worried about what they should do.
Running out of money in retirement is just like running out of fuel. Everyone thinks it’s about the day you run out. But it’s really about the years prior to that unfortunate event. It can be said, “You know you’re going to run out, but you just don’t know when.” – Dick Austin
Just as the friends stared at the glaring red “E,” many people in retirement are staring at their own “gas gauge”—their brokerage or savings account balance—waiting for it to run out. Unfortunately, life for many brings about the loss of peace of mind in retirement and the inability to enjoy the “scenery” along the way.
What Happened to the Friends in the Desert?
As the friends reached the peak of dismay, someone recalled that this particular model had a reserve tank. The switch should be easily accessible in the glove compartment.
“No way,” one proclaimed.
Another said, “I heard about that, but thought that was only on the more expensive models.”
“It can’t be. If that were true, the rental agent would surely have mentioned it!”
“Let’s open up the glove compartment and see.”
To their amazement, there it was. Once they activated it, the gas gauge showed that the car could safely reach the next gas station. What a relief! The passengers took a deep breath, and their trip was once again enjoyable.
The Real Discovery
As the travelers continued to read about this reserve tank, they discovered that their last-minute activation of the reserve tank was the least efficient way to use it. The reserve system had been designed to enhance the efficiency of gas usage and employing it as a last resort was actually less efficient.
Here’s what they found out:
- The main gas tank alone could take the vehicle about 500 miles.
- Turning on the reserve gas tank AFTER the main tank was nearly empty added about 75 miles.
- If they had used the reserve tank FIRST and THEN switched to the main tank, the vehicle would have gone an extra 180 miles.
- If they had switched back and forth between the two tanks based on the varying conditions outside, they could have gotten an extra 300 miles.
Unbelievable, right? Counterintuitive and almost illogical, but the principles are real.
The Biggest Surprise Yet
The reverse mortgage is the equivalent of the reserve gas tank in the parable.
- It’s designed for a long journey.
- It’s accessible to about 87% of retirees.
- When properly used, it can make a huge difference in the outcomes of consumers.
For most of their history, reverse mortgages have been rather unpopular with financial planners–viewed as a resource of last resort. However, the reality is that the strategic and prudent use of reverse mortgage has exploded over the past decade. There are many reasons for this, one of them being the important academic research done on the topic.
No More Loan of Last Resort
Where did “last resort” language come from?
The earliest written source came from a FINRA investor alert that reported, “Reverse mortgages should only be used as a last resort.”
Is that true? The answer has always been “no,” but we didn’t have the metrics to prove it until Dr. Barry Sacks, PhD, MIT trained physicist, Harvard Law graduate and ERISA-focused law practitioner, and his brother, Dr. Stephen Sacks, took that presupposition to task. (Here is the link to the published work, “Reversing the Conventional Wisdom: Using Home Equity to Supplement Retirement Income.”)
The research was profound and the summary quite simple: Using a reverse mortgage as a last resort is the least effective way to use it. Dr. Sacks further stated that using the reverse mortgage as a first option gives retirees significantly better outcomes than expected.
The research was so compelling that Dr. Sacks was asked to share it with FINRA, and in October 2013, FINRA changed their position on reverse mortgages by eliminating the “last resort” language. That’s right, they’re no longer a product of last resort!
Like the parable, many advisors don’t know or won’t talk about the reserve gas tank, and those who do know about its existence usually don’t know how to use it effectively. They mistakenly propose that their clients wait until they run out of assets before establishing a reverse mortgage. Dr. Sacks’ (and others) research advises this is absolutely the worst way to use the program.
The travelers in the SUV were beside themselves that the rental agent (who knew of their long journey) had not told them about every safety option. Your clients, too, will show the same disappointment if you are not giving them every resource available for their long retirement journey.
Advisors cannot afford to be wrong about housing wealth! There is too much at stake, and it’s too easy to get it right.