From Research Theory to Financial Vaccine for Covid-19 Crisis

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he Institute is happy to have guest expert contributors share their perspectives on topics important to our financial services readers. A recent article contribution from Institute member Harlan Accola, National Director of Fairway Independent Mortgage Corporation is very timely. He makes his case how the COV-19 pandemic revealed the lack of thorough advanced financial planning around a key area of retirement risk exposure and provided a real-world proof of concept around a shunned financial tool.

Everyone knows it is prudent to plan ahead whether you are talking about your money, your car, or your home. You should prevent a problem from happening instead of dealing with it after the damage is done. A recent Wall Street Journal article “Over 60 With Decades Left on the Mortgage: The New Retirement Math by Christina Rexrode did a great job of explaining a huge AND largely preventable problem that is rarely highlighted or talked about:

A full 40% of our seniors that hit 62 are still making a mortgage payment.  Many of them cannot afford the payment for the duration of their retirement and for those that can— it will decrease the fun and security that they could have with their “golden years”.

With the most recent Covid-19 crisis, the fall of the stock market, and the uncertainty for safe withdrawal rates of retirement nest eggs, the reverse mortgage strategy has just rose to the top with an exact proof of concept.  With many large and small banks making it far more difficult to borrow against home equity, the power of the reverse mortgage to create guaranteed liquidity has become a beacon in the night.  The ability to use home equity as a buffer asset to allow market losses to recover and thus mitigate sequence of returns risk is an undeniable advantage.  Of course, forbearance for those who cannot easily make mortgage payments was an unusual move by the housing agencies.  It is ironic that reverse mortgages are in permanent forbearance and payments are optional until a year after death for anyone over 62 with 50% equity.  Yet less than 5% of senior homeowners take advantage of the product as a strategic retirement planning tool!

Shouldn’t financial planners be familiar with and actively offering this valuable tool? Unfortunately, many are not.   Solid research has been done by the financial planning community.  The most recent research was clearly laid out in a book: Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement by Dr. Wade Pfau, PhD, CFA, from the American College in Bryn Mawr, PA.

The evidence bolstered by solid research, thousands of Monte Carlo simulations, and critical thinking is irrefutable.  With dozens of charts, graphs, and discussion, the facts show that retirees who do a reverse mortgage EARLY in retirement (at 62) show longer portfolio longevity, more cash flow, lower taxes, and— surprisingly— a greater legacy!  No other researcher has disputed Dr. Pfau’s findings because it is clear that while some people can get by WITHOUT doing a reverse mortgage—even wealthy retirees would be better off WITH a reverse mortgage.  He kills the idea that all other options should be exhausted before a reverse mortgage is used as a last resort.  In fact, his findings clearly show that NOT using a reverse mortgage or using it as a last resort show the WORST results in survivability and retirement efficiency.

So, there are two types of retirees— those that have a mortgage payment and those that do not.  It is clear that some can afford the payment and many cannot. The WSJ article clearly showed the dangers and inefficiency that having a mortgage payment creates.  It can make the difference between a great finish to a retiree’s life and an awful one.  It does not just make a little difference — for many it can create a financially unsafe situation.  For others who can afford it, it dilutes their legacy and efficiency of the money they strived and worked hard for over decades.  It is true they will leave their children with a mostly paid off house—maybe even a free and clear one— but in doing so,  they have sacrificed more cash, investments, life insurance and other more valuable assets they could have left the next generations or their charities.

If these are the facts— why has this not hit the financial planning mainstream?  Why are many so opposed— even angry— when the subject of doing a reverse mortgage is brought up.  Most financial advisors warn their clients NOT to put money into illiquid, low return assets and yet baby boomers over 62 have parked $7.1 Trillion and counting into home equity that is NOT liquid and has a zero % rate of return.  Of course, they save the 3-4% interest of a mortgage but that is all— the home will go up or down in value regardless if there is a mortgage on the home or not.  There are only two reasons there is such a negative attitude about a reverse mortgage.  One is arrogance and the other is ignorance.  Neither of those equate to wisdom and proper decision making and planning.

There are many who brag about having a home paid off free and clear and having “plenty of money” to make mortgage payments.  That arrogance from clients and financial advisors is a hard stop against investigating the facts and the research that is clear.   While those folks might make it to the end of retirement without setbacks— they won’t get there with the same efficiency, safety and net worth as if they did not try to store so much money in an inferior asset called “home equity”.

But the real concern is ignorance and that is painfully evidenced by the stories in the above WSJ article.  The vast majority of folks over 62 simply do not know they have an option to STOP making mortgage payments. Most of them have more than 50% equity which is the approximate required level to get a reverse mortgage.  At that point they can refinance to a reverse and have optional mortgage payments for the rest of their lives and only be liable for real estate taxes and insurance.  For millions of people that simple fact is life changing— it is the difference between an enjoyable retirement and a challenging one, between fear and security.  It is life changing.  This ignorance has gone on too long. It should not have to take a financial disaster or external pandemic to realize what is effective retirement planning.  Wayne Dyer said: “The highest form of ignorance is when you reject something you don’t know anything about.” These reverse mortgage facts need to see the light of day with both advisors and seniors.  Millions of financial lives hang in the balance.

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