The Old, Poor, Sick Fallacy

Laurie MacNaughton [506562] © 2016

As supper came to a close my engaging dinner companion surprised me – not because he said something I hadn’t heard before, but because I hadn’t heard it for a long time.

“My clients aren’t candidates for reverse mortgages. Reverse mortgages are basically for the old, poor, and sick.”

There is certainly no dearth of data on the matter, so I was somewhat taken aback by my colleague’s settled declaration.

Fact versus fiction

So what do the data show regarding homeowners who take out reverse mortgages?

Nationwide statistics show that homeowners with higher than average incomes, and above average educations, tend to take out reverse mortgages at an earlier age than do homeowners with lower income and education levels. Part of the reason for this is access to better information, such as Dr. Wade Pfau’s report in last month’s Forbes Magazine:

[Researchers] found that using the standby [reverse mortgage] line of credit improved portfolio survival without creating an adverse impact on median remaining wealth (including remaining home equity). This provided independent confirmation that the reverse mortgage line of credit can help mitigate sequence of returns risk without impacting legacy goals.

Though wealth managers tend to be well-informed about recent retirement research, many of our oldest, poorest, and sickest are not actively working with financial planners. On the other hand, regions of the country with the highest home values and the highest education levels also have the greatest numbers of homeowners originating reverse mortgages while in their 60’s, well before they need access to the funds.

Inaccessible wealth

Most Americans have the majority of their wealth tied up in their home – a dynamic called asset illiquidity. Reverse mortgage, fundamentally a home equity line of credit, is designed to enable homeowners to access some of that equity, while not obligating them to a monthly payment. And, in what is perhaps the least known feature of the reverse mortgage line of credit, the credit line accrues a compounding growth rate. This means by the time the homeowner does indeed need access to a safety net, in most cases that safety net has grown appreciably.

Reverse mortgages are not a fit for everyone – no one financial product is.

But a reverse mortgage is going to play an important role in many homeowners’ financial health in retirement, particularly when used as part of a sound, informed, long-term retirement plan.

For more information on how an FHA-insured reverse mortgage may help with your clients’ long-term financial goals, give me a call. I always love hearing from you.