Ignoring home equity in retirement could leave your loved ones with less

A better reverse mortgage can lesson investment risk

The Employee Benefits Research Institute (ERBI) reports that Social Security benefits provide about two-thirds of retirees with over half of their income during retirement. Defined contribution benefit plans typically make up the remainder of retirement income. According to ERBI projections, many Americans have not saved enough to last through retirement, suggesting that  44%, or more, of baby boomers and generation Xers will find themselves short of money at some point after age 62.

Financial advisors and their clients may be able to eliminate, or at least greatly mitigate, a retirement savings deficit by taking advantage of one of the most valuable assets many retirees have: home equity. US Census Bureau data suggests that, for many American home owners, home equity is about 60 to 70 percent of their net worth. Even so, few home owners and their wealth advisors consider monetizing their homes as a valid strategy to supplement retirement income.

Housing wealth as a component of retirement planning

Housing wealth in the form of a reverse mortgage can act as an important tool for increasing portfolio longevity during retirement. Reverse mortgages have undergone a makeover in recent years, eliminating the abuses that occurred in the past. Now called the Home Equity Conversion Mortgage (HECM), this new version of reverse mortgage is catching the attention of leading edge planners across the financial planning industry.

Robert C. Merton, Distinguished Professor of Finance, MIT Sloan School, has begun counseling financial professionals to include reverse mortgages when developing comprehensive retirement plans for clients. One of the most attractive characteristics of a HECM is that it’s a non-recourse loan. In short, it acts as both an income stream and an asset. “As long as you’re in the house, you pay nothing, even if you live to be 120,” says Merton.

When used as a sort of standby line of credit, it allows clients to avoid liquidating a portion of their retirement portfolios when an unexpected and urgent need for cash arises. This increases portfolio longevity and can expand personal satisfaction during retirement by allaying fears about having an income shortfall.

Further, should clients end up needing to access their HECM line of credit, they are not required to remit monthly principal and interest payments on the portion accessed.

Tweaking conventional wisdom on housing wealth

Traditionally, both financial planners and retirees sought to preserve housing wealth and access it only as a last resort. The idea being that if retirees could avoid using their home equity to supplement an income shortfall, they could leave it as part of a legacy for their heirs.

However, leading reverse mortgage expert, Wade Pfau, CFA (a Professor of Retirement Income with a PhD in Financial and Retirement Planning from the The American College of Financial Services) has written numerous papers and presented compelling research showing that strategic use of a reverse mortgage early on in retirement can actually increase total legacy wealth for an assumed spending goal. Alternatively, a reverse mortgage could allow for higher spending amounts for longer periods in retirement without withdrawing from a portfolio during a market downturn.

Pfau says, “We can think of legacy value at death as the combined value of any remaining financial assets plus the remaining home equity once the reverse mortgage loan balance has been repaid.” In other words:

Legacy Wealth = Remaining Financial Assets + [Home Equity – minimum (Loan Balance, 95% of Appraised Home Value)][1]

Brothers Stephen and Barry Sacks investigated the effect sustainable withdrawal rates from a portfolio coupled with home equity has on legacy wealth.[2] Their research compared three different strategies for using home equity as part of a retirement income plan.

  1. Conventional wisdom. This strategy stays true to conventional wisdom where retirees only obtain a reverse mortgage as a last resort after depleting the investment portfolio.
  2. Spend reverse mortgage funds first. This strategy involves obtaining a reverse mortgage line of credit from the start of retirement and spending it down first. Then begin using portfolio withdrawals for the rest of retirement. This allows the portfolio to grow, untouched, while spending down the reverse mortgage funds.
  3. Spend reverse mortgage funds only after down years. In this scenario, the retiree(s) take out a reverse mortgage line of credit, but only spend from it in years following a negative return for the investment portfolio.

Their research investigated how strategies two and three show a higher probability for success and were viable longer than the first strategy. Additionally, they found that remaining net worth (value of remaining investment portfolio plus value of any remaining equity) was twice as likely to be larger in the 30th year and/or beyond retirement than with the traditional thinking that advises only using home equity as a last resort.

In fact, the Sacks brothers found that for spending goals ranging from 4.5% to 7% of the initial retirement portfolio balance afforded a 67% to 75% chance that the remaining portfolio balance would be higher with strategy two or three than with the last resort strategy of conventional wisdom.

This occurs because strategies two and three act as a hedge against the deadly sequence return risks, which make it so difficult to develop a retirement plan that sustains enough net worth to last thirty years or more.

Options two and three both allow for portfolio protection and growth during market downturns with option three providing a more sophisticated method of dealing with sequence of returns risk by only accessing reverse mortgage funds when investments are vulnerable. Typically retirees who employ this option only spend from the line of credit after the decline of the investment portfolio’s net worth.

A case study conducted by Barry Sacks and Mary Jo Lafaye (Sacks and Lafaye, 2016) conducted and published a case study illustrating how a reverse mortgage can be used to prolong portfolio life.

The case study assumes the client has a $500,000 50/50 equity-bond portfolio beginning in 1973. It runs for 30 years with an initial withdrawal of 5.5% that increases using a 3.5% inflation rate.[1]


In the scenario using conventional wisdom, reserving home equity as a last resort option, the retiree ran out of money in 1996 with six years to go. But take a look at the coordinated strategy employing a reverse mortgage in early retirement. This strategy funds spending throughout the entire 30 years.

In fact, using this strategy can have dramatic results, according to the Sacks and Lafaye research. The retiree has spending fully funded for the 30 years and estate size increases by over $900,000.

Plan for retirement before you retire 

This case study demonstrates how simply and effectively the coordinated reverse mortgage strategy works. It directly addresses investment risk, is available to any individual homeowner entering retirement, but it is not right for everyone. A HECM might be appropriate for a variety of different planning needs and not just managing investment risk. Anyone approaching age 62 needs objective financial counsel.

Investigate better way to manage your finances

At Coyle Financial Counsel, a fee-only firm, we utilize a team of experienced advisors to develop a comprehensive financial plan. Our proprietary approach, TransformingWealth™, is designed to get your arms around the big picture so you can make informed financial decisions with conviction. Ask Rob about Coyle’s TransformingWealth Preview Meeting, and schedule a complimentary consultation so you can start living the Good Life Managed Well™.

Rob O’Dell, CFP®, serves clients in our Naples, FL office. With more than 20 years of personal financial planning experience, Rob knows that successful financial planning involves a distinct process, not a one-time event.

Rob has been featured in the Wall Street Journal, Financial Planning Magazine, The Daily Herald and Money Magazine. He was a contributing author on the Third Edition of the Florida Domicile Handbook. Learn more about Rob O’Dell.
800-480-7913 |

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[1] Wade Pfau, “Improving Retirement Income Efficiency Using Reverse Mortgages,” Forbes (Forbes), March 29, 2016,

2 “Improving Retirement Income Efficiency Using Reverse Mortgages,” Goals, March 29, 2016, accessed December 12, 2016,

3 “Increase Retirement Spending by Coordinating Investment Portfolios and Reverse Mortgages: Case Study by Barry Sacks and Mary Jo Lafaye,” Tools for Retirement Planning, August 20, 2016, accessed December 15, 2016,


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