By Scott Burns
Reverse Mortgages are the Rodney Dangerfield of financial planning tools. Long thought of as things retirees used in last-ditch efforts to stay in their house, they were seen more as leaky lifeboats than as financial planning tools. They were badges for people soon to be broke.
I should confess that I shared that view. Based on reader mail, reverse mortgages were great examples of too-little-too-late. The vast majority of the people who wrote in asking about reverse mortgages really needed to rethink where they lived, not draw down what was usually their last asset.
But all that may be changing.
If a recent Journal of Financial Planning paper gets traction, the use of reverse mortgages will move from people who are desperate to practical people who have both home equity and some financial assets. This will happen for a totally unexpected reason. Retirees can use a reverse mortgage as a tool for increasing the probability they won’t outlive their assets while increasing their retirement spending. In other words, if reverse mortgages are used early, rather than late, they can be as important in the retirement planning toolbox as life annuities.
Barry H. Sacks, a San Francisco tax attorney and Stephen R. Sacks, a professor emeritus of economics at the University of Connecticut (and the brother of Barry Sacks) made this discovery by thinking differently about financing retirement. Rather than wait until all financial assets were exhausted and then taking out a reverse mortgage, they asked how things would turn out if retirees took out a reverse mortgage first or early. This would allow them to use withdrawals from the reverse mortgage to delay or reduce withdrawals from financial assets.
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