6 Strategies for Incorporating Home Equity into Your Retirement Plan

Wade Pfau, a professor of retirement income at the American College of Financial Services just recently published a paper on six strategies for using a reverse mortgage as part of your retirement plan.  While there has been more research on this topic in recent years, Pfau’s research “…digs deeper into the underlying analysis about how reverse mortgage retirement strategies impact spending and wealth.”1

A Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, is a Federal Housing Administration insured loan.  A HECM enables seniors to access a portion of their home’s equity to obtain tax free2 funds without having to make monthly mortgage payments.3  Pfau states that, “It is a great shame for the financial planning profession that the conventional wisdom about reverse mortgages continues to remain so negative and to be based on so many misunderstandings about their potential uses.”4

Pfau’s six strategies for using home equity are outlined below:5

Ignore Home Equity:  The purpose of including this strategy is to establish a baseline probability of plan success when home equity is not used.

Home Equity as a Last Resort:  This method follows the conventional line of thinking when it comes to home equity.  The prevailing belief states that a line of credit via a reverse mortgage should only be opened once the investment portfolio has been exhausted.  The borrower would then use the line of credit until that is depleted.

Use Home Equity First:  This strategy says that a line of credit through a reverse mortgage should be taken at the beginning of retirement.  The line of credit is used to cover all retirement expenses until used in full in order to allow your investment portfolio more time to grow.

Sacks and Sacks Coordination Strategy:  With this method the borrower takes a line of credit through a reverse mortgage at the beginning of retirement.  The borrower uses the line of credit during years when their investment accounts experience negative returns.  This strategy assumes that the loan balance will not be repaid until it becomes due.

Texas Tech Coordination Strategy:  “This strategy performs a capital needs analysis for the remaining portfolio wealth required to sustain the spending strategy over a 41-year time horizon.”5  The borrower obtains a reverse mortgage line of credit at the beginning of retirement, and then uses it whenever possible when the retirement portfolio balance drops below 80% of the glidepath.  The glidepath is defined as the expected value of the borrower’s portfolio based on projected returns and distributions over time.  If the borrower’s wealth rises above 80% of the glidepath, then any reverse mortgage balance is paid off as long as the borrower’s wealth doesn’t fall below the 80% mark.

Use Home Equity Last:  This is the same as the “home equity as a last resort” option mentioned above with one exception.  The line of credit is opened at the beginning of retirement and is left to grow.

Use Tenure Payment:  In this strategy a line of credit is obtained at the start retirement and then the borrower draws fixed monthly payments from the line of credit for the life of the loan.

According to Pfau, the strategy for using home equity as a last resort supports the smallest increase in success.  Whereas, “opening a reverse mortgage line of credit at the beginning of retirement, in order to let the credit line grow before being tapped, provides the highest increase in success rates.”1  Pfau also states that “…Use of tenure payments or one of the coordinated strategies can also be justified as providing a middle ground which balances the upside potential of using home equity first and the downside protection of using home equity last.”4

If you’re interested in finding out more about these strategies and how a reverse mortgage line of credit could help, call 800-218-1415.


1 6 Strategies for Using Reverse Mortgages in Retirement Planning – reversemortgagedaily.com, by Jason Oliva, 11/11/15, http://reversemortgagedaily.com/2015/11/11/6-strategies-for-using-reverse-mortgages-in-retirement-planning/.

2 Consult your financial advisor and appropriate government agencies for any effect on taxes or government benefits.

3 You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance and maintain the home according to Federal Housing Administration requirements.

4 How to Use a Reverse Mortgage to Protect Your Retirement Income – msn.com, by Robert Powell, 11/11/15, http://www.msn.com/en-us/money/retirement/how-to-use-a-reverse-mortgage-to-protect-your-retirement-income/ar-CCeLuB?srcref=rss.

5 Incorporating Home Equity into a Retirement Income Strategy, by Wade D. Pfau, Professor of Retirement Income at The American College, Director of Retirement Research, McLean Asset Management, November 2015, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2685816

Author:  Meredith Manz