“With 77 percent of a retiree’s net worth locked in home equity it’s astonishing why so many financial planners ignore home equity when creating retirement plans.” So states this recent article we just discovered on the financial website MarketWatch. Written by Denver-based reverse mortgage planner Peter Rueth, the article makes a compelling case that a home equity conversion mortgage, or HECM – commonly called a reverse mortgage – ought to play a much more significant role in the retirement plans of today’s baby boomers.
The problem, Rueth postulates, is that “home equity is often ignored when it comes to retirement planning.” He calls this oversight “astonishing” at a time when so few baby boomers, the oldest of whom are now past the age of 70, have any sufficient amount of retirement savings set aside. Let’s look at the case made by MarketWatch’s Rueth and see how an HECM may potentially benefit you as you plan for your retirement future.
Rueth begins by quoting research from the Insured Retirement Institute which shows that one-quarter of baby boomers have no retirement savings at all. That’s the worst performance in this study since its inception in 2011. Even among those with some money set aside, the picture is pretty bleak, Rueth says: more than 40 percent of boomers have retirement savings amounting to less than $100,000. “Even retirees who have been successful in saving have big concerns because of rising medical costs and increased life expectancy,” Rueth says. “Retired baby boomers and those quickly approaching retirement are troubled their nest egg savings will fall short and risk outliving their retirement funds.” For that reason, financial advisers are continually looking for ways to help their clients maintain a healthy and fitting quality of life in retirement.
Writing in MarketWatch, Rueth points out an odd paradox: “a major component of wealth and retirement planning often overlooked or ignored is home equity.” Data compiled for the U.S. Census Bureau in 2013 shows that the average couple entering retirement has a net worth of about $194,000. “However,” he writes, “when home equity is removed net worth drops to just $43,921. With 77 percent of a retiree’s net worth locked in home equity it’s astonishing why so many financial planners ignore home equity when creating retirement plans.” Housing experts peg the total amount of equity in senior-owned housing in the U.S. at an eye-popping $6.3 trillion. Could it be that this huge sum represents a big part of the retirement solution for baby boomers? Rueth would answer “yes,” and he’s not alone.
In the MarketWatch article, Rueth quotes American College tax professor Jamie Hopkins. In an article in Investment News, Hopkins urged financial planners to be much more aware of the opportunities represented by careful use of home equity. “Far too many financial advisers overlook home equity as part of a retirement income plan,” said Hopkins. “With heightened regulatory concerns about doing what is in the best interest of the client, it would be prudent to explore and discuss home equity strategies with clients.” He adds this important caveat: “Remember, there’s no magic home equity strategy that always works best. As an adviser, you need to incorporate home equity solutions into the client’s unique situation.”
Here at AgingOptions, while we definitely advocate the reverse mortgage for some uses, we confess a degree of concern that these financial tools can be oversold by zealous reverse mortgage marketers. That’s why we were somewhat reassured to read this cautionary note from the MarketWatch article. “Too often,” Peter Rueth writes, “a reverse mortgage is advised as a quick fix for cash, or worse, as a loan of last resort when all else fails.” However, he adds, “Working with a well-versed financial adviser a reverse mortgage can be customized to meet or complement a number of retirement financial goals” including long-term care planning, purchasing the right house, remodeling your home to age in place, improving cash flow, or providing peace of mind for unexpected expenditures. This kind of cautious, customized approach is also why we only refer our AgingOptions clients and radio listeners to trusted HECM experts including the highly experienced and thoroughly professional Laura Kiel of Kiel Mortgage, a frequent guest on our radio program.
Rueth makes a strong case for one of the most popular features of a reverse mortgage, the line of credit – but we think he takes the case a bit too far. “Astute pilots will never leave the ground without sufficient fuel in their reserve tank,” he writes. However, “Many go flying into retirement with only their cruising tank full expecting these funds to meet their needs” – needs which can quickly change. The line of credit represents the reserve tank, providing quick access to an essential cash reserve. There are prudent ways to use these funds, as suggested above. However, we strongly disagree with some of the uses for this credit line that Rueth suggests, such as helping a child or grandchild with a down payment on their first home or seed money for a new business. He even implies using these important funds for items on your wish list – the Corvette or fishing boat. This strikes us as dangerous thinking, the kind that gets unwary retirees into deep trouble.
But the bottom line is that Rueth makes a point: retirees should at least talk with a trusted pro like Laura Kiel and find out what a reverse mortgage can do for you. At the same time, if retirement planning is on your To Do list for 2018, why not accept our cordial invitation to join Rajiv Nagaich at an upcoming LifePlanning Seminar? There you’ll discover the power of a LifePlan: a unique and comprehensive approach to retirement planning in which all the facets of retirement that too often work at odds with one another actually mesh together seamlessly. We’re talking about the Big Five of retirement: financial, legal, medical, housing and family planning, woven together like the strands of an unbreakable cable. A LifePlan is the key to fulfilling your lifelong dreams of a safe, secure and fruitful retirement.
Find out more by attending a free LifePlanning Seminar at a location that’s convenient for you. We offer these throughout the region, so for currently scheduled seminars, visit our Upcoming Events page here – then register online or contact us during the week. There’s no cost and no obligation, only the opportunity to see your retirement dreams come true. Age on!
(originally reported at www.marketwatch.com)