Maybe taking the same amount out of your retirement account every year isn't the best idea
Using a Reverse Mortgage to Weather Market Turmoil
by Cliff Auerswald
Factors to Consider to Determine the Best Retirement Age for You
Reverse Mortgage for Home Maintenance
A Baby Boomer's Financial Timeline
It used to be that reverse mortgages were seen as a last resort. Tapping into home equity was often reserved as a last-ditch effort once other options had already been taken among the 62-plus population who qualified to borrow against their home.
But today, reverse mortgages are actually being used in a very different way and among a very different population: savvy investors who are using home equity to weather market storms and other unexpected financial events.
Several renowned finance professionals and academics including famed finance columnist Jane Bryant Quinn are beginning to make headlines with this new strategy. Instead of reverse mortgages being used among households who lack wealth, they're being advocated for households that have wealth specifically to help preserve it.
Tapping home equity with a reverse mortgage line of credit
Among the reverse mortgage options available, one way for borrowers to access their loan proceeds is through a line of credit. Like other credit lines, the borrower can draw on the funds when he or she needs them and can make repayments at any time.
There is a unique feature of a reverse mortgage line of credit, however, that a typical home equity line of credit does not offer. This is known as the growth feature of the reverse mortgage LOC, and it means that borrowers can actually access more proceeds (in other words a larger line of credit) the longer they wait to access it.
The untouched line of credit gets bigger over time at a rate based on the interest rate of the loan. For this reason, finance experts recommend taking the reverse mortgage as early as possible in order to maximize the potential benefit it offers.
Home equity should be viewed simply as a bucket of money, like any accessible funds, this new wisdom says. In other words, it should be considered alongside any other accessible funds, such as market investments or 401(k)s. The key is tapping into home equity at the right times like when other investments aren't doing well or when there are steep penalties if you do access them.
Financial planners consider a concept called "sequence of return risk." The idea is that an individual's financial situation will be impacted differently based on the order in which different events take place. For example, for an individual who is heavily invested in the stock market, a market crash will be much harder to recover from when the individual is 65 years old than when the individual is 35 years old.
Financial planners feel that home equity should be seen as an alternative to selling market investments prematurely.
Weathering market swings
For most retirement age people today who have investments, the recent financial crisis took a toll. During 2008, U.S. equity indexes were down sharply, according to the Employee Benefit Research Institute (EBRI), noting that the S&P 500 index lost 37% over the course of the year and greatly impacted 401(k) plan balances.
Have you started preparing for retirement?
Our pre-retirement checklist will walk you through the steps you need to take.
Of course, the financial crisis was an extreme event, but subsequent years have also been turbulent for many investors. Nearly 70% of investors lost money in 2015 year, according to Openfolio, an investment performance tracking app. Those who fared best financially during the year held cash or took substantial risks neither of which is advisable for retiree or pre-retirees.
These swings can be tied to global events or domestic ones, and in most cases, no one can predict them. Home equity can be the answer to weathering these storms via a reverse mortgage line of credit.
If you are interested in tapping into your home equity or to learn more about how a reverse mortgage can help you weather market swings, speak to your trusted adviser or contact a reverse mortgage expert for more information.
Cliff Auerswald is co-owner of All Reverse Mortgage. Visit their site for more information about a reverse mortgage line of credit and using a reverse mortgage for long term care. Don't forget to find out how much you could borrow using the reverse mortgage calculator.
Take the Next Step:
- Consider these 3 strategic uses for a reverse mortgage line of credit. You might find it beneficial to get one now even if you don't need the money.
- Get more answers to your reverse mortgage questions by visiting the Dollar Stretcher Library.
- Subscribe to After 50 Finances. You've learned how to work smarter, not harder. This weekly newsletter is dedicated to people just like you. Subscribers get a FREE copy of our After 50 Finances Pre-Retirement Checklist, a list of everything you need to do to be ready for retirement.
Share your thoughts about this article with the editor.
Baby Boomer Tools & Resources
- A tool to determine the best time to take Social Security benefits
- Get out of debt before you retire
- Get free answers to financial questions
- Get free answers to legal questions
- Retirement shortfall calculator
- Life expectancy calculator
- IRA required minimum distribution calculator
- More retirement planning calculators
Trending in Baby Boomers
- Investing retirement money that you may never need
- Financial tips when nearing retirement
- Why pay off your mortgage with a reverse mortgage loan?
- 3 ways retirees can tap into their home equity
- 2 reasons to collect Social Security benefits as soon as possible
- Talking to aging parents about finances
- Should you create a trust?
- Budget friendly ways to turn back the clock
- This week's Readers' Tips