American College Thought Leaders Weigh in On Reverse Mortgage
Recently, two of my good friends and partners Jamie Patrick Hopkins and Dr. Wade Pfau were asked about the changing nature of Reverse Mortgages at the 2017 Retirement Income Summit sponsored by Investment News. Their answers are contained in this short video and the full transcript is below. Jamie also appeared on a PBS sponsored show called Wealth Track speaking about why Why Reverse Mortgages Must Be Considered as a Part of Portfolio Management
These days’ financial planners are increasingly becoming more open-minded about reverse mortgages, but in terms of how they approach that with their clients they need to be careful because it takes a while for everyone to get education and there may be a lot of clients who still have a very negative perception about reverse mortgages.
So I think for the advisor, the first question is; would you consider a reverse mortgage? It’s really we’ve got a back up from there and talk about what kind of youth do you see for your home equity. Do you plan to live in the same home, do you want to leave that home as a legacy gift to your children, how do you really envision home equity, are you willing to consider using the home equity as a source of retirement income? And so on and so on and then if the client seems comfortable with that sort of discussion, you can introduce the reverse mortgages. I know they have a negative reception you see those late-night commercials about them that they seem like it’s not a great idea, but I’ve been to conferences, I’ve learned a lot about reverse mortgages.
It’s really a new ballgame in terms of how they’re regulated and approached and how they can be used in a retirement income plan. And at that stage; I think that can open the discussion. If the clients open minded about the possibility to having a discussion, if the client just thinks it’s the worst thing ever and thinks you’re a crook for recommending it, then you probably just don’t really approach that topic with that particular client.
So, there a number of ways that advisors and consumers can use home equity and reverse mortgages and strategic ways. One of them is really just a bridge for social security; you can set up reverse mortgage for that gap maybe from 62 to 70 so you can get income to meet your needs and still the first Social Security and get all the benefits of the deferral credits. We also can use home equity and reverse mortgages strategically as part of a portfolio management system; which really means those sequence of returns risks that we’re really worried about, that we can kind of dampen those a little bit by drawing from home equity early in retirement as opposed to having to sell when the markets down.
For the type of client that is best suited for a reverse mortgage I think a few characteristics that are important are: (1) they’re planning to stay in the home and then maybe they’re going to move in a year or two, so in that case probably just wait until they move to consider the reverse mortgage, but they should stay there for some period of time just to compensate for the upfront cost involved.
(2) As well it really needs to be used as part of a responsible retirement income plan. If you have a client who tends to overspend and who may take this new liquid asset and spend it in a wasteful manner, then that’s really not a good idea probably they’re better off just leaving that asset Il-liquid even if it’s not the most efficient strategy. The fact that they would spend it irresponsibly, but we have to protect them from doing that.
But it’s not for a client in the last resort type of situation, but for a client they’re not necessarily going to run out of money, but it’s a way to as part of an overall plan. Really improve the efficiency of that plan and potentially leave a larger legacy or support a higher spending rate in their retirement. Then that’s the kind of clients that can approach it in a realistic and not wasteful manner and who plans to stay in their home that’s really the two main circumstances for having that sort of discussion with the client.
There are a lot of people that aren’t great fits for reverse mortgages and those are people that early in retirement they want to move or they’re going to continuously move throughout retirement or maybe they just have a deep seated resentment against using home equity and there are a lot of people saying I don’t want to use my home equity, I don’t feel comfortable with that strategy they’re not a good person for it.
So we’ve got people who are moving, people that have big negative conceptions against it and also people who want to leave a specific home to their heirs’ right. If you want to leave your beach home where you move into in retirement and leave that specific house to your kids, a reverse mortgage might not be the right solution for you because we can’t guarantee that that house value and the home is still going to be there at the end of retire.
So, there’s a question about are reverse mortgages going to be the next hot topic and I’ve been thinking that from the retirement income perspective. I know Social Security was really a very hot topic, advisors were learning about Social Security claiming they were running seminars for their clients and for prospects about how to claim Social Security in a more efficient way. In November 2015 there were changes with Social Security and all the momentum went out of Social Security. Since that time I’ve been predicting that reverse mortgages would replace Social Security as a next hot topic.
There’s been amazingly positive media coverage all the major consumer publications have now written positive stories about reverse mortgages. I do think it’s been slower than I was anticipating that I don’t think reverse mortgage new loans are all that much higher this year than they were past year. So I’m kind of surprised that it is going slower than I expected, but I do still think there’s that potential that indeed reverse mortgages will receive more attention, more press coverage.
There will be more clients that want to talk about it and increasingly it’s going to be something that an advisor needs to be comfortable talking about and be familiar with the different research and approaches for the reverse mortgage