Older Americans are facing financial constraints that can be eased with these loan products
By Ed Robinson
Financial challenges are straining retirees’ budgets as never before. On a macro level, they are contending with worsening inflation, a struggling stock market, tightening supply lines, the lingering COVID-19 pandemic and military conflict in Europe — global-scale events that are largely outside their control.
On a personal level, the standard three-legged stool of Social Security, pensions and personal savings is wobbling and showing signs of breaking under mounting economic pressures.
To gauge the impact of inflation on older Americans’ retirement plans — just one of the many pain points they’ve been experiencing — 66% of seniors said that it would have a negative effect, according to the Modern Retirement Survey from American Advisors Group. The survey was conducted on Dec. 8, 2021 and included 1,580 participants.
• 66% are worried about the impact of inflation on their savings.
• 53% say the cost of living is higher than expected.
• 36% say they have less money than expected at this point in life.
• 29% fear they may outlive their retirement funds.
• 37% feel they need to increase their monthly cash flow.
• 39% believe the previous generation had an easier time retiring.
Fifty-three percent of seniors said that the cost of living was higher than they expected. More than one in three said they have less money than they thought they would have at this point in their lives, while 29% reported fears that they would outlive their retirement funds.
When the May 2022 inflation number came in at an 8.6% annual rate, CNBC dusted off the “rule of 72,” a quick, back-of-the-envelope type of calculation that shows just how damaging inflation can be. By dividing 72 by the inflation rate, one can estimate how quickly higher prices will halve the value of your savings. Using this formula (72 divided by 8.6), your money would be cut in half in roughly eight years. And the inflation rate got worse in June.
Although the social contract may be fraying for an increasing number of older Americans, one area of wealth that hasn’t unraveled is their home equity. Indeed, it has significantly increased. At the end of 2021, homeowners 62 and older saw their housing wealth reach a record $10.6 trillion, according to an index maintained by the National Reverse Mortgage Lenders Association and data management company RiskSpan.
One group that will help reenergize the reverse mortgage, which may come as a surprise, is the adult children of older Americans. Many of them are more favorably inclined toward reverse mortgages than their parents.
One of the keys to unlocking some of this record equity is a reverse mortgage. A reason why more older Americans aren’t turning the key and opening the door to this untapped wealth may be a lack of awareness and understanding of what a reverse mortgage is and what it can do. This product has changed to the point that it is able to serve older Americans across the entire income spectrum.
More than 60 years ago, a widow took out the first reverse mortgage, which enabled her to stay in her home despite the loss of her late husband’s income. A reverse mortgage still fills this purpose today, but it’s also a product with optionality that continues to expand far beyond its original intent. Borrowers, of course, are still obligated to comply with the terms of the loan — including payment of their property taxes and home insurance, and maintaining the home.
Think of a reverse mortgage in the same context as WD-40, the now iconic water-displacement lubricant for which fans invented a host of other uses and applications, from removing paint smudges and chewing gum from surfaces to waterproofing snow boots and baseball gloves. Similarly, one of the most appealing and innovative uses of a reverse mortgage has come in the area of wealth management.
Imagine you are a retiree drawing down your investments at a monthly rate that you and your wealth adviser agreed upon. You’re doing so in safe and responsible amounts to ensure you will not outlive your funds. Suddenly, along comes a major market correction (stocks falling between 10% and 20% off their recent highs) or a bear market (declines of 20% or greater) that substantially reduces your portfolio.
From 1974 to 2021, there were 24 market corrections, five of which led to bear markets. Selling assets in a declining market without giving them a chance to rebound is a sure way to lock in losses and miss future increases in value. It also means that without an alternative cash source (such as a tax-free reverse mortgage) to draw upon on until the market recovers, your portfolio won’t last as long as you had envisioned.
Another phenomenon that could jeopardize a retirement portfolio of stocks is the “sequence of returns risk,” whereby an investor experiences negative returns early in retirement. These losses are far more consequential when they occur early in retirement. Again, if the investor had a reverse mortgage in place, damage to the portfolio would be less severe. During times of market volatility, potential borrowers should consult with their financial advisers to determine if this option fits their situation.
Drawing funds from a reverse mortgage also can be a way for families to leave an investment portfolio intact so they can more easily pay it forward it to the next generation. While a reverse mortgage doesn’t necessarily mean that more money will be left to heirs, it can give seniors more control over which types of investments are used and which are saved for the inheritance.
Another optimal use of a reverse mortgage that is often overlooked is the purchase a new home that checks more of the retirement boxes, like closer proximity to family or valuable services and amenities. Typically, the borrower uses a portion of the proceeds from the sale of their previous home for the down payment and completes the purchase with a reverse mortgage. Because they’re not paying all cash for the new purchase, they can put the extra money in the bank or make more of their desired upgrades to the property.
Clearly, reverse mortgages aren’t the nascent, niche product designed decades ago. These loans have more applications and relevance than ever before, regardless of where someone falls on the income spectrum. Yet it still comprises less than 2% of all mortgages.
Why isn’t more being done to drive this product? It’s like having an expensive car collecting dust in your garage. After pouring money into it year after year without getting any return, why wouldn’t you sell it and begin to realize its value?
To begin altering the perceptions of cash-poor, equity-rich homeowners, mortgage companies can pour money into marketing, advertising and public relations campaigns. But the job of converting consumers into actual clients is best done by a mortgage originator — the people with their feet on the street.
Given how the traditional refinance market has all but dried up, originators should jump at the chance to add another tool and skill to their sales repertoire. They should reach out to estate planners, homebuilders, attorneys, accountants and others, educating them so they can become ardent advocates for these versatile loans.
One group that will help reenergize the reverse mortgage, which may come as a surprise, is the adult children of older Americans. Many of these people are more favorably inclined toward reverse mortgages than their parents. As members of the so-called sandwich generation, stuck between caring for their children and their parents, their eyes are wide open to solutions that can make everyone’s life easier.
The relevance of a reverse mortgage has never been greater. It was a good product when it was introduced, but it’s a far stronger and safer product with much more optionality today. Limits have been placed on the amount of money that can be taken out in the first year.
The LESA (Life Expectancy Set-Aside) account introduced in 2015 sets aside some of the borrower’s loan proceeds to ensure they can comfortably pay their property taxes and homeowners insurance. Further improvements also make it possible for an eligible spouse not on the reverse mortgage to continue living in the home as long as the couple was married when the loan was approved and the spouse continues to comply with the borrower’s original loan terms.
The reverse mortgage industry has a remarkable story to tell. When people hear it, regardless of where they are on the income spectrum, they are going to walk away with some new ideas and fresh approaches on how they can better put their home equity to work for their retirement.
Just as your clients face market and financial challenges, you must deal with them as well. You should be prepared to do whatever it takes to increase awareness and adoption of reverse mortgages so that older Americans have more opportunity to live and retire better.