From a very young age we were told to save for our retirement, build up a nest egg that would help to supplement social security payments. The goal was not to just retire but to retire comfortably, to travel, to live a life of financially secure luxury. Pensions, IRAs and 401ks were the steady foundation of most retirement plans. For the more adventurous, stock portfolios were added to the mix to take advantage of favorable market conditions. As retirement age approached we would be ready.
But as the financial services market created investment vehicles to help us diversify our retirement strategy another industry was also making advancements that would affect us in our golden years. The health and wellness industry, awash with R&D money and grants from the government were finding ways to increase life expectancy. Illnesses and conditions that were once considered untreatable were now treatable. Prolonging life as well as improving the quality of life of our senior population has become a challenge to our retirement planning. The money needs to go farther. For many, returning to the workforce is not an option and even if it is the opportunities and financial benefits are limited. So how do we make our retirement savings go farther? More and more financial advisors are recommending reverse mortgages loans as the solution.
Reverse mortgages, which tap into the equity of primary residences, offer an opportunity to make the initial retirement savings go a long way. A recent study published by Jerry Wagner of Ibis software, a reverse mortgage software provider, was recently included in the Journal of Financial Planning. Deviating from what was known as the 4% rule, which determines the spending success of an individual’s portfolio throughout the course of a 30-year retirement, Wagner introduces the 6% rule, outlining a portfolio’s spending success when it is supplemented by a reverse mortgage.
The study affirms that with a 30-year spending horizon and a first-year withdrawal of 6%, reverse mortgages can provide "spending success" levels of 88-92%. Wagner’s study shows that the 4% rule works well with portfolios that are at least 50% invested in equities, and then shows how the use of a reverse mortgage can be used to "easily create new rules, such as the 6% rule for a 30-year horizon."
Reverse mortgages can benefit retirees by supplementing their retirement portfolios with additional funds, however, common misconceptions surrounding the loans continue to be a challenge—one that financial planners must acknowledge in their discussions with clients.