A Huffington Post article1 touts the benefits of reverse mortgage loans for moderately wealthy Americans. Historically, reverse mortgage loans have been called the “loan of last resort” and are often marketed toward retirees that “have no other options”. However, there is a growing trend to get a reverse mortgage by people who have almost enough saved to live comfortably during retirement. Financial planners have termed this group the “mass affluent”. However, Barry Sacks, a California tax attorney, author and expert in reverse mortgage trends, says “It’s a very misleading term because they aren’t massively affluent. Rather, there’s a mass of them and they’re almost affluent”. This group refers to people who have between $750,000 and $2,000,000 in net worth at retirement.
The mass affluent tend to have enough to make ends meet during retirement. They typically do not have enough assets to be concerned with minimizing their estate tax when they pass away. This group also normally has their retirement savings in a 401(k) or an IRA. Their home is usually almost paid off. They may have $750,000 to $1,000,000 in savings and another $750,000 to $1,000,000 in the equity in their home.
Sacks claims that this is the group who is most helped by a reverse mortgage loan. “The point of how to use it is the most important thing. If it’s used as a last resort after all of the other assets are exhausted during retirement, that’s the conventional wisdom. And it turns out to be wrong. The conventional wisdom for a long time has said if you have your home equity, keep it in reserve. If you need it when you’ve exhausted all of the other money, then you have it working for you.”
Sacks also points to the volatility of one’s securities portfolio held in a 401(k) and IRA accounts. Should a retiree dip into his retirement account when the portfolio is down and continues to draw from those accounts, he may go through his savings too quickly. Should the same retiree get a reverse mortgage loan, there may be a better chance the funds will last through retirement. He can dip in to the funds from the reverse mortgage loan when his other accounts aren’t earning as much. Then, when the market stabilizes again, he can go back to his retirement portfolio.
There are also groups for whom a reverse mortgage loan may not be beneficial. Financial planners agree that the super wealthy don’t need the security of a reverse mortgage loan. Typically, their retirement portfolios and home values are significantly more than the mass affluent. Additionally, those who have very little in retirement savings may not see enormous benefits from a reverse mortgage loan. It may help some, but for many, they just do not have enough equity built up in their home to make a reverse mortgage beneficial for the long term.
One major downfall of the reverse mortgage loan has been for retirees who don’t pace themselves. In the past, borrowers could use up the entire amount of the loan in a short period of time. “What has given reverse mortgages a very bad name was that before people knew about using it as a financial planning tool, they grabbed the dough and consumed it, not thinking that they’ll need the money 10 years from now,” Sacks says. Today, that’s not as likely as there are restrictions in place that allow the borrower to take only 60% of their total loan amount during the first 12 months.
It’s a good idea to meet with a financial planner before and during retirement. Financial planners can help workers prepare for retirement. They can also help retirees make adjustments to their retirement accounts and spending habits. Reverse mortgage loans are not the best option for all retirees, but for many retirees, especially those in the mass affluent group, a reverse mortgage loan could be the right fit.