KIPLINGER’S On Reverse Mortgages: An ‘Outside-the-Box’ Solution for Financial Stress

“Today is the future I created yesterday.”- Louise Hay 

The COVID-19 pandemic has caused an enormous amount of economic volatility, making generating retirement income much more challenging, and turning to outside-of-the-box financial tools might be the most effective solution.

In a recent column at Kiplinger, financial professional Charles Rawl highlighted federally insured home equity conversion mortgages (HECM) as an income-generating solution that should be considered by older Americans.

According to Rawl, “This is no time to be stuck in ‘conventional wisdom’ paradigms.”

He writes “Tools that may have developed a bad reputation in the past, such as reverse mortgages, may deserve a second look. While their history of misuse is well documented, the industry has repositioned itself so that today’s reverse mortgages might be considered an important and sophisticated financial tool for some.”

He adds “The intelligent use of a reverse mortgage, particularly a federally insured home equity conversion mortgage (HECM) line of credit, could extend an individual’s or couple’s retirement resources in a way that more traditional strategies cannot.” 

Below are a few of the ways highlighted by Rawl that an HECM can be more effective in generating retirement resources. 

Using An HECM As A Tool To Help Preserve Net Worth  

“Sequence of return risks” – this was already a legitimate concern before the coronavirus pandemic and recent market volatility. Now, it is even more important.

Rawls says, “When the market experiences a downturn early in your retirement, when you’re no longer contributing to your retirement accounts and you’ve begun to take withdrawals, it can be tough to recover from a major loss,” He continues. “An HECM line of credit can be used as a buffer to help protect against adverse portfolio returns, because retirees can carefully coordinate distributions from their portfolio and their HECM line of credit based on their needs and current market conditions.”

Using An HECM To Pay For Unexpected Expenses 

“The use of a tax-free HECM line of credit for unexpected (or even planned) purchases or shortfalls in cash flow can be extremely beneficial in retirement — and not just because it can provide much-needed funds. An HECM also can protect against the raiding of other retirement resources when those costs come up.”

ANOTHER HECM BONUS 

Another bonus he mentions, “An HECM line of credit has a clear-cut advantage over the use of a traditional credit line in that it has a guaranteed growth option (the growth applies to unused funds) and a “non-recourse” feature.”

“Unlike traditional home equity loans or lines of credit, an HECM line of credit can never be prematurely closed and collected.”