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.

Understanding Reverse Mortgages: An Interview with Shelley Giordano

Tools for Retirement Planning

SOA research has shown that non-financial assets are the biggest part of retirement assets for many middle American families. The largest part of non-financial assets by far are home values. Housing is the largest item of spending for older Americans, and housing costs vary greatly by geographic area and type of housing. Reverse mortgages offer a way to use some of the value of the home while still living in it. The SOA post-retirement risk research has indicated that few retirees are taking into account home values in their retirement planning. The 2015 focus groups indicated low interest in reverse mortgages. People thinking about planning have been asking the question: how do we take housing values into account in retirement planning? What are the options? How do we evaluate them? This interview with Shelley Giordano provides information about reverse mortgages and how they are being used today.

Full story at https://toolsforretirementplanning.com/2017/05/06/understanding-reverse-mortgages-an-interview-with-shelley-giordano/

The 6.0 Percent Rule

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.
https://www.onefpa.org/journal/Pages/The%206.0%20Percent%20Rule.aspx

The Most Critical Reverse Mortgage Research: 2017 Edition

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/