by Shaun Pfeiffer, Ph.D.; John Salter, Ph.D., CFP®, AIFA®; and Harold Evensky, CFP®, AIF®
This study investigates maximum real sustainable withdrawal rates (SWRs) for retirement plans that incorporate the use of standby reverse mortgages (SRMs). The SWR is defined as the maximum real withdrawal rate with a minimum 90 percent plan survival rate for a 30-year retirement horizon.
The SRM evaluated in this study is a Home Equity Conversion Mortgage (HECM) reverse mortgage line of credit that is established at the beginning of retirement and is used for retirement income during bear markets. Outstanding loan balances are repaid from the Investment Portfolio (IP) in bull markets.
Monte Carlo simulations were used to estimate the success of the SRM strategy at various real withdrawal rates for a client who has a $500,000 investment nest egg and $250,000/$500,000 in home equity at the beginning of retirement. The $500,000 nest egg is split into a 60 percent stocks and 40 percent bonds IP and a six-month cash reserve.
Retirees who begin retirement in a low interest rate environment (2.3 percent yield on 10-year U.S. Treasury bond) with competitive lending terms and significant home equity relative to the IP stand to benefit the most from an SRM strategy. Interest rates and the size of the initial line of credit relative to the IP are the two factors that are shown to have a significant impact on the SWR for the SRM distribution strategy.
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The 4 percent rule has come under scrutiny because of lower expectations about future security returns. Monte Carlo simulations using expected asset class risks and returns that reflect the current economy show that the first-year withdrawal can be 3.75 percent and increased for inflation each year. At 3.75 percent, portfolios with a 60 percent or higher equity exposure give a 90 percent chance of “spending success” over 30 years.
The cash proceeds from various reverse mortgage plans can be taken in different ways. Scheduled monthly tax-free advances reduce the need for portfolio withdrawals and can give better “spending success” levels than line-of-credit draws.
The increase in spending success levels depends on the relative value of the home and the portfolio. Given a portfolio value, higher home values raise success rates.
With a 30-year spending horizon and first-year withdrawal of 6.0 percent, reverse mortgage scheduled advances as a portfolio supplement give “spending success” levels of 88 to 92 percent. Even with a first-year withdrawal of 6.5 percent, success levels are still 83 to 86 percent. This paper provides financial planners with a review of the relative merits of using a reverse mortgage as a retirement spending supplement.
Tracking down vital research on reverse mortgages can be challenging. So rather than spending a good chunk of valuable time sifting through countless Google search results, Reverse Mortgage Daily (RMD) has made the hunt easier by compiling the most critical reverse mortgage research in recent years.
For reverse mortgage professionals who are looking to communicate with financial planners in a meaningful way, consider reading these key research items to aid you in conversations with advisers, their clients and other financial service professionals.
Full story at https://reversemortgagedaily.com/2017/01/03/the-most-critical-reverse-mortgage-research-2017-edition/