Reverse mortgages can be used to serve a variety of needs in retirement, not the least of which is using home equity as an insurance tool to cover aging related expenses.
Today, Americans are living longer lives than ever. Thanks to advancements in modern medicine, the average life expectancy in the U.S. has grown steadily since the 1950s, from approximately 68.2 years to 78.8 years in 2013, according to the U.S. Census Bureau. But with this increased longevity also comes increased risk, particularly when planning for the future.
Such risk is only exacerbated as retirees face unexpected health issues that may arise as they age. The high price tag generally associated with medical costs, coupled with the sudden shock of a personal health issue, demands having a strategic retirement income plan in place—one that doesn’t ignore the value of housing wealth, according to several professionals in the financial services, gerontology and reverse mortgage sectors.
The costs that retirees face during their non-working years can be broken down into two main categories: expected expenses (e.g. housing, food, health care coverage, including premiums and co-pays, etc.) and unexpected expenses (e.g. changes in health status, long-term services and supports, home modifications, home repairs, vehicle maintenance, etc.).
As people age and live longer, paying for health-related expenses stand to bear the heaviest financial burden on retirees.
For couples who retire at age 65, it is estimated that they will spend approximately $245,000 on health care expenses during their retirement, according to a recent study from Fidelity Investments. If this same couple wants a 90% chance of having enough money to pay for health care expenses in retirement, they will need to have saved at least $392,000 by age 65 to cover these costs, according to the Employee Benefit Research Institute.
“If you fail to plan for those expenses, you have planned to fail,” said Barbara Howard, adjunct professor of gerontology at the University of Bridgeport in Connecticut, during a webinar Tuesday.
The webinar, which was hosted by the American Society on Aging, is part of the inaugural Education Week initiative spearheaded by the National Reverse Mortgage Lenders Association. Through a series of webinars, Education Week aims to teach professionals who work with seniors about reverse mortgages and how these loan products can help meet their clients’ needs.
Tuesday’s webcast brought together Howard, a gerontologist, alongside Jamie Hopkins, associate professor of taxation at The American College in Bryn Mawr, Pa., as well as Dan Hultquist, an Atlanta-based Certified Reverse Mortgage Professional with Open Mortgage.
Together, each of these presenters discussed the use of home equity in retirement income planning, and how it can be used within the context of helping retirees plan for the costs of aging.
Hopkins, a frequent reverse mortgage commentator, likened retirement income planning to shooting a moving target in the wind. The “target,” which is being able to meet a client’s goals, is going to change over time, he said, but so will that person’s goals and the expenses they encounter on their path to retirement.
Meanwhile, the “wind” is all of the risks people face in retirement, including longevity, the need for long-term care and sequence of returns risk (to name a few)—all of which are going to influence the path it takes for workers to finally reach their future retirement goals from where they are today.
“However much we can reduce the wind, the easier it is going to be to plan,” Hopkins said. “Taking home equity into consideration can help reduce those risks.”
Reverse mortgages can fit into a retirement income plan in several different ways, Hopkins noted, whether it is simply providing retirees with additional cash flow, allowing them to defer Social Security, or helping them improve their systematic withdrawal strategy to reduce sequence of returns risk—a method that various research has highlighted using reverse mortgages as a standby line of credit.
“Home equity needs to be part of a comprehensive retirement income plan—and I stress needs,” Hopkins said. “It’s one of the biggest assets people have and it can dramatically improve the retirement income plan.”
Retirees can also use a reverse mortgage line of credit to reduce their tax liability, said Hultquist.
“Since draws from a reverse mortgage aren’t taxed, in later years you can withdraw from that to stay within your tax threshold,” he said.
Hultquist is the author of “Understanding Reverse,” a guidebook that provides answers to some of the most common reverse mortgage questions. In his work as a Home Equity Conversion Mortgage trainer, Hultquist frequently dispels misconceptions regarding reverse mortgages.
During Tuesday’s webinar, he gave an overview of the HECM program and discussed several of the most significant program changes, including the upfront draw limitations, Financial Assessment and changes to the non-borrowing spouse policy. He also fielded several questions from attendees curious about what happens to the reverse mortgage principal limit if home values drop; how reverse mortgages impact Medicaid eligibility; and what the benefit is to FHA for insuring the HECM program.
“[The HECM program] is designed to be a stabilizing force for retirement,” Hultquist said. “When you think of the pillars of retirement income—Social Security, savings and pensions—all three of those have issues. Social Security might not be enough to supplement people’s needs; fewer people have pensions now; and Boomers have a disproportionate amount of wealth tied up in real estate and not in savings. The HECM program was another form to allow people, especially Boomers, another form of retirement income.”