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Today’s retirees are increasingly dependent on their investment portfolios to provide for their income. Since pensions are less common, the risks have fallen on them to deal with producing sustainable income and planning for longevity.

One of the most dangerous risks to new retirees occurs through no fault of their own. It’s simply a matter of timing and bad luck. This risk is the “sequence of returns risk” and is the focus of our case study.

Sequence of Returns Risk

Sequence of returns risk refers to the unknown order of your investment returns.

We all know there are good years and bad years in the market–we just don’t know when they will occur. As a saver, volatility doesn’t matter too much. But market volatility does hurt retirees, especially market volatility early on.

Receiving negative returns in the first few years of retirement can have a profound effect on your portfolio’s ability to sustain your retirement income. Taking withdrawals during poor market conditions mean you have less money working for you when the market eventually recovers.

Even if (when) the market recovers, those withdrawals during down markets can shave years off your portfolio’s income potential. A reverse mortgage line of credit can help solve this problem.

A reverse mortgage line of credit

Remember, a reverse mortgage is a way for senior homeowners to access their home’s equity. It differs from a traditional mortgage or Home Equity Line of Credit (HELOC) because monthly payments are not required.

The key in this case study is to start a reverse mortgage as early as possible in retirement. Why? Because you are opening an increasing line of credit. The earlier you start, the more the line of credit can grow.

A retirement income case study

Consider this example of a retiree needing $28,000 per year adjusted for inflation from his $400,000 portfolio. As you can see, starting retirement with two negative performance years puts a strain on his portfolio in his later years.  He ran out of money at age 87.

How can a reverse mortgage help this retiree?

Reverse mortgages: tool of last resort

The first option is to open a reverse mortgage line of credit, but only use it as a tool “of last resort.”  

If he puts a reverse mortgage line of credit in place early on, he can simply use his home equity once his portfolio runs out.

This scenario is illustrated below.

While this scenario worked out for our retiree, there is a more optimal way to use his reverse mortgage.

Reverse mortgages: coordinated withdrawal strategy

Instead of waiting until your money is exhausted, a second option is to proactively use a reverse mortgage line of credit in coordination with portfolio withdrawals.

The idea behind this approach is to take your income from the line of credit in years after a market downturn.

By using the reverse mortgage line of credit instead of your investment portfolio, you are giving the market time to recover without putting further pressure on it by making portfolio withdrawals.

The results are powerful, and the strategy is simple. Every year you review your portfolio’s performance from the previous year. If the performance was positive, you take your income. If the performance was negative, you take your income from the line of credit.

In this scenario, the portfolio experienced five negative years. Portfolio withdrawals were paused each subsequent year, giving his investments time to recover without the added stress of withdrawals. He had the same resources available to him as the first scenario—same starting portfolio value, and same line of credit. But the coordinated withdrawal strategy left him with a portfolio value over $1.5 million.

The differences between these two scenarios are staggering.  It makes me wonder why more people who did a good job of saving don’t consider a reverse mortgage.  Reverse mortgages aren’t only for people in desperate situations looking for a lifeline.  They can make an already good retirement plan even better by preserving assets after market downturns.

Adding a reverse mortgage to your retirement income plan

Every senior homeowner should consider a reverse mortgage, but that doesn’t mean it’s for everyone. It’s a decision that should be made with a wise advisor, a financial planner, and possibly even your adult children.

At Stewardship, we have financial planners and mortgage advisors who are here to help.  If you are 62 or older and are curious about a reverse mortgage, schedule an appointment to talk with a home loan advisor.

If you want a more comprehensive plan including investment management and retirement planning, schedule an appointment to talk with an investment advisor.