Reverse mortgages could be very beneficial for wealthy seniors, study finds


Affluent American seniors – generally defined as people with $ 100,000 to $ 1,500,000 in investable financial assets and annual family income above $ 75,000 – could benefit greatly from using a mortgage. reversed as a risk mitigation tool, which could reduce exposure to longevity and market risk while also growing investment portfolios.

That’s according to a study published in the Journal of Financial Planning, co-authored by Phil Walker, Dr Barry Sacks and Dr Stephen Sacks.

As market volatility has accelerated recently, exposure to such volatility has the potential to destabilize investors’ retirement plans. This could disrupt the income and quality of life of these retirees. However, if a reverse mortgage loan is used as an “asset buffer” during a period of high market volatility, then pulling out of a reverse mortgage line of credit until the market stabilizes can be an important step towards. a more stable portfolio, according to the study.

“[T]those who use a reverse mortgage as a buffer asset during slack years are expected to reduce their exposure to market volatility by almost 10 times and could significantly increase their net worth over a 30-year retirement, ”according to a statement released by Finance of America. Invert (FAR) based on results.

To dig deeper into the study’s findings, RMD spoke with co-author Phil Walker, who himself works as vice president of strategic partnerships in FAR’s retirement strategies division.

Formulation of the study, the most surprising finding

As the broader reverse mortgage industry has for some time wooed financial planners to serve as potential referral partners, this new research was designed to offer further corroboration of the potential benefits that a reverse mortgage could offer. to some customers, Walker explained.

“I’ve been presenting the coordinated exit strategy, uncovered in the 2012 Sacks and Sacks study, for years and to thousands of financial advisers,” Walker told RMD. “It has always received a very positive response from financial advisers, but almost no progress from the world of wealth management compliance. I decided to reread the Sacks and Sacks study and realized that since the strategy dramatically improves long-term portfolio growth without making any changes to that portfolio, something has to happen to risk.

The goal of the study, in turn, was to both identify and quantify this risk, says Walker.

“As financial advisers, we are taught the basic concepts of risk and reward,” he says. “Normally, a higher reward means a higher risk. This strategy had to reduce the risk somewhere and significantly. This led to the first conclusion that for retirees volatility is a risk. “

When asked about the most startling finding, Walker was quick to point out the level at which the identified risk could be addressed for a mass affluent retiree who chooses to incorporate a reverse mortgage into their retirement plan.

“What was most surprising about the research is that the degree to which we can reduce risk has been an important finding,” he says. “For years we have advocated for this strategy, but now we have more solid empirical data that adds further support to our strategy. The study found that using this strategy can reduce exposure to market volatility, and therefore reduce risk exposure, by almost 10 times. This is much more than we initially imagined and is important given the ability to reduce retirees’ risk of running out of money and dramatically increase their earnings over time.

Since many clients of financial professionals are concerned about their choices requiring a step back in the ability to maintain a particular lifestyle, the addition of additional rationale for determining a client’s risk tolerance has been suggested. a key finding, he says.

“No one wants to go back, and the study shows that this strategy could be a very useful tool for asset managers monitoring a client’s risk tolerance,” he says. “Dr. Barry Sacks was instrumental in identifying that the benefit of using a buffer asset (reverse mortgage for the most part) could be beneficial at any point in retirement. The biggest benefit obviously is for those who use the strategy early in retirement, as the longer time horizon means more exposure to volatility, but there is still a significant advantage for those who can only deal with one final market downturn in their retirement trip.

What reverse mortgage originators should take away from the study

Asked about the most actionable research that could be applied to loan originators, Walker encouraged LOs to share the results with their colleagues, contacts and relevant compliance departments.

“Conventional wisdom is that in retirement all debt is bad, but research shows that is no longer true,” says Walker. “Most high net worth people, those with between $ 500,000 and $ 1.5 million in investable assets, are taking unnecessary risks if they don’t engage in the coordinated exit strategy. As we mention in the study, reducing risk is important and has fiduciary implications for advisers and their firms.

The ability of a reverse mortgage to act as an “asset buffer,” and with more substantiated information surrounding this strategy, may allow clients to make more informed choices about their investment and retirement planning decisions, says -he.

“Creators should consider sharing the study with their local consulting firms and have them pass it on to their compliance departments,” says Walker. “This is especially useful for small to mid-sized RIAs, who tend to be more accessible and more agile with change. Companies should also implement a verification strategy to decide which customers to recommend the strategy.

Impact for non-affluent borrowers

Although the study was largely designed to provide information relating to mass affluent customers, there are some potential implications the research may have on reverse mortgage borrowers more generally “needs-based,” says Walker.

“If we assume that a needs-based borrower is likely to run out of money before life expectancy, they can potentially extend the life of their portfolio with this strategy,” he says. “However, these people usually do not have a financial advisor, so sharing the information with tax and other financial professionals might help. Right now, our findings have the greatest implications. for the mass of the rich and their financial advisers. “

Indeed, a wealthy client will generally not run out of money if they use a safe withdrawal rate, but could benefit from the ability to “potentially give themselves an occasional raise or increase their legacy of philanthropic goals,” explains Walker.

Read it to study at the Financial Planning Association.


Comments are closed.