The Reverse Mortgage Tenure Payment as an Annuity Alternative? Dr. Wade Pfau Weighs In

An Interview with Dr. Wade Pfau

My good friend and colleague, Dr. Wade Pfau, recently released an article in Forbes detailing how the tenure payment can be used as an alternative to purchasing an income annuity. This reverse mortgage monthly payment “annuitizes” the clients’ housing wealth in place of another financial asset. We also discussed it at length in this 7-minute interview.

Read Wade’s article: The Tenure Option As An Annuity Alternative

Video/Article Summary

[0:40] Tenure Payment – income while eligible | Income Annuity – income for life

[0:51] Different formulas for calculation:

Tenure Payment – higher interest rate (more income) > age 100 (less income)

Income Annuity – age, gender, current interest rates and mortality projections

[1:37] For a tenure payment, a lump-sum premium is not required. In practice, it behaves more like an income annuity with a cash refund provision.

[2:28] Probabilities of success for four different strategies: (1) tenure payment, (2) income annuity with modified asset allocation, (3) income annuity with same asset allocation and (4) no income annuity with reverse mortgage as last resort.

[3:25] Reverse mortgage proceeds may not be used to purchase products or investments.

[3:48] How can an insurance professional incorporate reverse mortgages?

[4:38] Why Americans often struggle with purchasing income annuities.

[5:48] Sample case study: Why one couple used both an income annuity and reverse mortgage in their retirement income plan.

What Is a Tenure Payment?

One of the ways you can receive the reverse mortgage funds is by converting all or some of the remaining line of credit into monthly payments. Many clients are used to having money deposited into their bank accounts month-by-month, so this can be a familiar and preferable way to receive the proceeds.

One type of reverse mortgage monthly payment is called the Tenure payment. Based on your client’s age, the value of their home, and current interest rates, the lender determines the maximum amount they can receive each month for the entire duration of the loan.

These payments, insured by the Federal Housing Administration of the U.S. Department of Housing and Urban Development, are guaranteed to come to your clients for as long as they maintain the terms of the loan (live in and maintain the property, pay your property related taxes, and keep homeowner’s insurance in force).

The following chart shows the amounts a retiree can receive based on a $400,000 home value.

How Can Reverse Mortgage Monthly Payments Be Used?

The tenure payment’s uses are wide and varied. It should be noted that reverse mortgages proceeds (including tenure payments) should not be invested or used to purchase a product. In many of the examples below, the tenure payment serves as a way for retirees to fund their lifestyle–freeing up cash flow that can be used however they would like.

  • Liquidity Replacement
  • Portfolio Replacement
  • Mitigating Portfolio Risk
  • Social Security Deferral
  • Gap Healthcare
  • Qualified Plan Deferral
  • Annuity Deferral for Vesting
  • Tax Bracket Management
  • Lifestyle Funding

This list is an excerpt from Don’s books. For more information

Does the Tenure Payment Replace Income Annuity?

Many risk adverse retirees are hesitant to pull the large sum from their portfolio or cash savings that an income annuity would require. It can be hard for them to lose a sense of liquidity. In these cases, the reverse mortgage tenure payment can compliment an income annuity.

For instance, a risk adverse client takes $150,000 out of savings instead of $300,000 and purchases an income annuity. To supplement their future income, they can establish a reverse mortgage line of credit and turn on the monthly payment feature when they need to. This way the clients get (1) guaranteed income for life [annuity], (2) the liquidity they desire [cash] and (3) tax-free, supplemental funds for their retirement lifestyle [tenure payment].

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®

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