Integrating Home Equity and Retirement Savings through the “Rule of 30”

Figure 3: Ratio of initial home value to initial portfolio value

by Peter Neuwirth, FSA, FCA; Barry H. Sacks, J.D., Ph.D.; and Stephen R. Sacks, Ph.D.

This paper examines the effect of using reverse mortgage credit lines to supplement retirement income by two types of retirees that have not been addressed in the previous literature: (1) those whose retirement savings are significantly below those of the mass affluent; and (2) those who are “house rich/cash poor.”

Results of this analysis demonstrate an important contrast with the results of the earlier literature; specifically, the greater percentages of home value, when coordinated with the retirement savings portfolio, resulted in substantially greater percentages of the portfolio that can be drawn.

This paper suggests a new alternative to the 4 percent rule that can guide planners and retirees toward an optimal cash withdrawal strategy. This new rule takes into account the total of the retiree’s retirement savings plus his or her home value.

The quantitative analysis in this paper uses the same spreadsheet models and strategies first presented in the Journal by Sacks and Sacks (2012). This paper builds on that work by extending the analysis to a broader range of retirees.

Full paper here

Reversing the Conventional Wisdom: Using Home Equity to Supplement Retirement Income

by Barry H. Sacks, J.D., Ph.D., and Stephen R. Sacks, Ph.D.

Figure 1: Cash flow survival propability chart

This paper examines three strategies for using home equity, in the form of a reverse mortgage credit line, to increase the safe maximum initial rate of retirement income withdrawals.

These strategies are:

  1. the conventional, passive strategy of using the reverse mortgage as a last resort after exhausting the securities portfolio; and two active strategies
  2. a coordinated strategy under which the credit line is drawn upon according to an algorithm designed to maximize portfolio recovery after negative investment returns,
  3. drawing upon the reverse mortgage credit line first, until exhausted.

Full paper here.