Why Your Retirement Plan Should Include a Reverse Mortgage — Financial Planner transcript

Should you consider a reverse mortgage for retirement? Experts at TheStreet’s Retirement, Taxes & Income Strategies Symposium discuss the pros and cons.

Julie Iannuzzi  and Justin Ho

Apr 24, 2019 8:24 AM EDT

mortgage digital concept

https://www.thestreet.com/video/reverse-mortgage-for-retirement-planning-14923039

Steve Resch, Financial Planner.

VIEW TRANSCRIPT (see below)

Retirement is filled with all sorts of risks including longevity, inflation, unexpected health care needs and costs, sequence-of-return risk and the list goes on.

To be sure, no one product or strategy can manage or mitigate all the risks that you may face in retirement. But a reverse mortgage can be used to manage many of the risks one might face in retirement.

Reverse mortgages was the subject of a panel discussion at TheStreet’s Retirement, Taxes & Income Strategies Symposium, held recently in New York.

“I honestly think that that’s one of the best uses of a reverse mortgages, is to actually help mitigate those risks,” says one of the panelist Steve Resch, Vice President – Retirement Strategies, at Finance of America Reverse.

TheStreet’s moderator and editor of TheStreet’s Retirement Daily sat down with Resch after the panel discussion. Resch says anything that is going to disrupt or interrupt a planned 30-year retirement period can be mitigated by incorporating home equity and a reverse mortgage in particular into a retirement-income plan

(SEE THIS VIDEO TRANSCRIPT BELOW).

Some risks in particular that can be managed and mitigated with a reverse mortgage include sequence-of-returns, long-term care expenses and unexpected expenses.

Related Retirement Daily Content: Biggest Myths About Medicare and Long-Term Care

VIDEO TRANSCRIPT:

Robert Powell: 
Welcome, Steve.

Steve Resch: 
Thank you, Bob.

Robert Powell: 
If you don’t mind, start by giving us a little bit about yourself, your title.

Steve Resch: 
Sure.

Steve Resch: 
I am vice president of retirement strategies with Finance of America Reverse. And basically what that means is that for our company, I go around the country talking to financial advisors about using reverse mortgages in the retirement planning process.

Steve Resch: 
I’m also a financial advisor. I’m a partner in a firm I started 25 years ago, and I’ve been using reverse mortgages in my planning practice for about 15 years now as well.

Robert Powell: 
So we just concluded a panel discussion about all the risks that people might face in retirement and the tools that they might use to mitigate and manage some of the risk. So talk a little bit about how maybe reverse mortgages play in terms of their use and value in managing these risks.

Steve Resch: 
I honestly think that that’s one of the best uses of a reverse mortgages, is to actually help mitigate those risks. From my perspective, it’s anything that is going to disrupt or interrupt a planned 30-year retirement period can be mitigated, hopefully, with some incorporating home equity in that planning process. So we look at risks such as sequence of returns.

Robert Powell: 
Which is?

Steve Resch: 
Which is if your investments are not performing the way you anticipate them doing, why would you sell out your investments if you need cash flow when you could have an alternative income source, and that would be using home equity as an alternative income. So we can mitigate risk using home equity and that sequence of returns risks, using home equity for that.

Steve Resch: 
There’s other risks, such as long-term care expenditures. A lot of people may have long-term care plans in place, but we don’t know if that’s going to be sufficient or enough for them down the road. So having an available access to home equity to mitigate that risk is, in my opinion, better than having to draw excess funds from their portfolio to fund that risk.

Steve Resch: 
So long-term care events, sequence of returns, then there’s also simply unexpected expenses. For example, I had a client who called me and they said that their son-in-law just up and left their stay-at-home daughter and her three children, and left them in a terrible financial mess, and they needed money to help them out. So the question is do you risk your future asset growth and your distribution plan that’s already in place to help out in this emergency situation, or do you incorporate home equity, let that be used to help the family, and there’s no payments required using that as well. So they have the money to help the family without changing their household cashflow situation.

Robert Powell: 
Alright.

Robert Powell: 
Talk a little bit about the requirements that need to be met in order to actually get a reverse mortgage.

Steve Resch: 
Well you have to be 62 or older to get it.

Robert Powell: 
And that would be both spouses?

Steve Resch: 
Yes, but there are protections now if you have a spouse who is not 62. So the non-62 person on title would not be on the loan. However, if the borrower died, the non-borrower could remain in that property for the rest of their life without having to pay any payments as well. So they’re not forced out. So this is a protection that’s been put in place.

Steve Resch: 
But you do have to be 62 or older, it has to be your primary residence that you put this reverse in place on.

Robert Powell: 
Right. And you have to take some educational training courses.

Steve Resch: 
Yes. And that’s another thing that’s a very important. It’s a safeguard that has been put in place. There’s always been counseling required ever since FHA got involved in 1988, but the counseling has been greatly intensified. So the counselors have full control on whether you can get a reverse mortgage or not. They have to give you a certificate. And if they don’t feel you understand the program, if you don’t understand what you’re doing, they will deny you that certificate, and you would not be able to get a reverse mortgage.

Robert Powell: 
And there’s a limit on how much you can actually get in your reverse mortgage relative to the value of the home?

Steve Resch: 
Yes. The amount you can get is based on your age and the value of the property, and there’s a percentage of that. The lenders do not control that. As far as the FHA products go, HUD controls that. It’s a formula set by HUD.

Steve Resch: 
We also have proprietary reverse mortgage products, and those loan to valuations are set by the lender.

Robert Powell: 
Right. So years ago, there wasn’t much research, there was no body of knowledge around reverse mortgages.

Steve Resch: 
Correct.

Robert Powell: 
Today, there’s a great deal of research and espousing strategies that make it more accessible to folks in terms of sequence of return risks.

Steve Resch: 
Right.

Robert Powell: 
The one study that I’ll mention is the one that referred to the notion that it would be good to get a reverse mortgage at age 62 with a line of credit, and and use it when their sequence of return risk exposure, and pay it back when the market comes back up.

Steve Resch: 
Right.

Robert Powell: 
Talk a little bit about that strategy.

Steve Resch: 
And actually by putting in place at age 62, what you’re doing is growing and compounding that line of credit at an earlier age, because the line of credit grows and compounds at the same rate as your cost of funds. So the earlier you put this in place, the greater your line of credit will be down the road. So then it’s in place so that when you do retire, whether you retire at 66 or 70 or whatever it is, you have this available funds to manage those sequence of returns risk, which would be if the investments are underperforming at the time you start a distribution plan, your better option would be leave your investments alone, take your needed funds that you were going to take from your investments out of your home equity, let your investments recover, and then draw on those later down the road when they’re in a better position.

Robert Powell: 
So another common use, I think, of reverse mortgages is the notion that many people want to age in place, age in their home, and many homes are not age-friendly, and the ability to put in place universal design is one way to tap into home equity and not necessarily have to move out.

Steve Resch: 
Exactly. Yes. And setting up your home to be a accessible or senior-friendly is expensive, and if you have someone who is in that home and they want to stay there, and they’ve got their investments and their distribution plan is in place, the question is how do you effectively fund the renovations that are needed for this home without disrupting that portfolio and your distribution rate.

Steve Resch: 
So again, it’s an opportunity to have the home take care of that, mitigate that risk of drawing down too much money from your investments.

Robert Powell: 
Any do’s and don’ts that you might recommend?

Steve Resch: 
The one thing that I will tell my clients too when we’re considering a reverse mortgage is to not really put it in place unless it’s with a home that you intend to stay in. If you’re only going to be in that home another five, six years or whatever, if your thought is, “I’m going to move to Florida in the next five years,” don’t put a reverse in place now, because it really is a long-term planning tool for someone who wants to age in place in that home.

Steve Resch: 
There’s costs involved, and so you don’t want to incur a lot of costs when you’re only going to be there for a short period of time. But you can, however, use a reverse to purchase a new home as well, and that’s a great opportunity. I know a lot of times when you are even downsizing, if you’ve been in the home a long time, even downsizing will cost you more money. So this is a great opportunity to get into the home that you want without having to drain excess capital from your resources.

Robert Powell: 
I’m told that the new term is rightsizing.

Steve Resch: 
Rightsizing. Exactly. It’s rightsizing. Yes, it’s rightsizing.

Steve Resch: 
I have people who have actually moved up in size, but they liked the home better, and it was better laid out for them. So yes, it is rightsizing.

Robert Powell: 
So other mortgages, there are jumbos available in the reverse mortgage market?

Steve Resch: 
Yes there are. This is pretty new, this started in the past couple of years. In fact, our company has been in the forefront of developing new proprietary products. They are for jumbo properties. They are not FHA-insured. The lender takes the risk, but they are still no-recourse loans just as the FHA-insured products are. But these are for loan amounts up to $4 million that we can do. We have multiple options on them, including options with a line of credit, options with flex pays so you can take your money out of your home over a period of time, rather than all at once.

Steve Resch: 
So I think this is a new wave that we’re going to be seeing is more and more development of proprietary products, just to help fill in the gaps that the FHA-insured products don’t always cover.

Robert Powell: 
Right. So a jumbo would cover from a minimum of say what?

Steve Resch: 
Well it depends on what you’re looking at. For example, the jumbo products that we have will cover a non-FHA-approved condominium that is at least $500,000, where FHA products are up to $726,000. So it depends on where you’re looking and what type of property. But I would say for the most part, probably $800,000, $900,000 and higher, you could maybe look at a jumbo product. They’re not available in all states yet. We have to be approved in each state, but we’re working on that. We’re doing very well.

Robert Powell: 
Great. Thanks, Steve, for joining us.

Steve Resch: 
Okay. Thank you. Thanks for having me.

Retirement is filled with all sorts of risks including longevity, inflation, unexpected health care needs and costs, sequence-of-return risk and the list goes on.

To be sure, no one product or strategy can manage or mitigate all the risks that you may face in retirement. But a reverse mortgage can be used to manage many of the risks one might face in retirement.

About “Sequence of Returns Risk” in the HECM discussion

Financial advisors increasingly recommend Home Equity Conversion

Retirement Planning Steps For Everyone; Consider income

 

1 thought on “Why Your Retirement Plan Should Include a Reverse Mortgage — Financial Planner transcript

  1. “For a lot of people, the idea that home equity is a retirement bank, while well established among the financial gurus, is just too much to comprehend. We will stay on course here at Go Financial as long as we can while you sort it out. Don’t make the mistake of thinking we are dumb because we wait for you, but we do that willingly because we believe what we are doing is correct and wise.” Warren Strycker, veteran financial professional.

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