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How to use a reverse mortgage to protect your retirement income

Advisers have long looked down on reverse mortgages: Only the most desperate of Americans — those who failed to save enough for retirement or those who spent unwisely in retirement — would ever need to use such loans.

But a growing body of research is showing that homeowners of all stripes should consider using a reverse mortgage in conjunction with their portfolio-withdrawal strategy. Such loans, where you borrow from the equity in your home, can help you preserve your nest egg, leave a legacy, or both.

The latest research on the subject comes from Wade Pfau, a professor of retirement income at the American College of Financial Services in Bryn Mawr, Penn. In his study, Pfau examined six ways to use a reverse mortgage as part of retirement-income plan and the upshot is that homeowners now have a framework for deciding which strategy might be best for them.

“Strategic use of a reverse mortgage can improve retirement outcomes,” Pfau wrote in his just-published paper, Incorporating Home Equity into a Retirement Income Strategy. “The benefits are nonlinear in nature, as they relate to the synergies created by reducing sequence risk for portfolio withdrawals and to the non-recourse aspects of reverse mortgages that can potentially allow a client to spend more than the value of their home.”

Other researchers, we should note, are also praising the use and value of reverse mortgages, and the need to incorporate housing wealth into a retirement-income plan. Read Robert Merton on the Promise of Reverse Mortgages and the Peril of Target-Date Funds and No Portfolio is an Island.