I spend a lot of time on the road. Not just for my job, but also because my wife and I both have families who live within four hours driving distance of my house. Making sure everyone’s favorite Uncle Mike makes it to the latest family event requires some flexibility. On many of those long drives through Indiana, I have found the GPS route that delivers me to my destination changes from one day to the next. Because of traffic, weather or construction, I end up taking alternate routes on roads I’m not familiar with. But sometimes the alternate route is best.
Helping clients navigate the ever-changing retirement income market means you have to be innovative. Maybe you’ve never heard of using Home Equity Conversion Mortgages (HECMs) as part of an income planning strategy. But, with almost $31 trillion dollars of unused housing wealth available right now, it’s time to talk to clients about this alternative vehicle.
There are unique advantages to using housing wealth as part of the income planning process. This tool does not work in every situation, but it can provide added income and flexibility for many clients. Here are some key advantages:
As our clients age and navigate multiple longevity-related issues, it’s important to maintain flexibility in their plans. Home Equity Conversion Mortgages can provide liquidity when they need it most. And, these tools can take pressure off existing assets under management during the income distribution phase.
There’s more than one path to a successful retirement plan. Look at alternatives to relieve pressure from assets under management – tools like HECMs can provide flexibility and put your clients in suitable housing. You can help your clients be in the driver’s seat as they retire and face longevity risks.
The marketplace is demanding financial professionals to work in our clients' best interest, which will not only need to address retirement income, but also the risk of longevity.
*The American College RICP® Retirement Income Literacy Survey, September 2014, p. 88: http://retirement.theamericancollege.edu/sites/retirement/files/Retirement_Income_Literacy_Survey_Full_Report_0.pdf
Mike McGlothlin is a tireless advocate for the retirement planning industry. As executive vice president of retirement at Ash Brokerage, he heads a team providing income planning solutions focused on longevity and efficiency. He’s also a thought leader who provides guidance and assistance for advisors and broker-dealers navigating marketplace and regulatory changes. You can find a collection of his blog posts in his book, “Above the Clouds … Winning Strategies from 30,000 Feet.”
Recently, I heard retirement specialist heavyweight Tom Hegna share at story with some very powerful truths that are relevant to every financial advisor. These life-changing principles are vital to prevent seniors from running out of money in retirement. The original story is from Dick Austin – he contributed to Tom’s book, “Retirement Income Masters: Secrets of the Pros.”
To summarize, some friends from the Northeast had always wanted to visit the desert. So they flew to Death Valley, rented a car and headed across the desert. The trip was wonderful – everyone was having a great time! But suddenly, they noticed a road sign that read, “Next Gas Station 100 miles” … and their gas gauge was rapidly approaching “E.” Their joy quickly turned to anguish, and they worried about what they should do.
Dick wrote that running out of money in retirement is just like running out of fuel. Everyone thinks it’s about the day you run out. But it’s really about the years prior to that unfortunate event.
It can be said, “You know you’re going to run out, but you just don’t know when.”
Just as the friends stared at the glaring red “E,” many people in retirement are just staring at their own “gas gauge”— their brokerage or savings account balance— waiting for it to run out. Unfortunately, life for many brings about the loss of peace of mind in retirement and the inability to enjoy the “scenery” along the way.
So what came of the friends in the desert? I like to think they discovered their rental car’s reserve tank – they just had to flip a switch in the glove compartment. Once they activated it, the gas gauge showed that the car could safely reach the next gas station. What a huge relief! All the passengers took a deep fresh breath of air. Their trip was once again enjoyable.
But that’s not the best part! As the travelers continued to read more about this reserve tank, its technology and its scientific ingenuity, they discovered their last-minute ploy was actually the least efficient way to use the tank. It had really been designed to enhance and optimize the journey, and using it only as a last resort was the worst way.
Unbelievable, right?! Counterintuitive and almost illogical, but it’s true. No, not the part about an SUV going through the desert (that part is made up), but the principles are real.
Reverse mortgages are the reserve tank for most retirees.
I know what you’re thinking: “You’ve got to be kidding me!” No, I am not.
For most of their history, reverse mortgages have been rather unpopular with financial planners, due both to their relatively high costs, and the fact that they are typically viewed as a resource or tool of last resort. Yet the reality is use of reverse mortgages has exploded over the past decade due to newer, lower cost options. Several recent research articles in the Journal of Financial Planning have illustrated methods showing how reverse mortgages can be used proactively to enhance retirement income sustainability.
Where did this language of “last resort” come from?
The earliest written source actually came from a FINRA investor alert that quoted “Reverse mortgages should only be used as a last resort.” Is that true? The answer has always been no, but it wasn’t until Dr. Barry Sacks, a PhD, MIT trained physicist, Harvard Law graduate and ERISA-focused law practitioner, and his brother, Dr. Stephen Sacks, took that presupposition to task that we actually had the metrics to prove it.
I won’t get into all the details right now, but you can find the full article and videos HERE with links to the published work, “Reversing the Conventional Wisdom: Using Home Equity to Supplement Retirement Income”
The research was profound, but the summary was really quite simple: Using a reverse mortgage as a last resort is the least effective way to use it. Dr. Sacks further stated that using the reverse mortgage as a first option gives retirees significantly better outcomes than expected.
The research was so compelling, Dr. Sacks was asked to share it with FINRA – in October 2013, FINRA changed their positon on reverse mortgages by eliminating the “last resort” language. That’s right, they’re no longer a product of last resort!
The facts are out and the results are in. The reverse mortgage is truly the reserve tank in retirement income planning. Any advisor who is still suggesting that they only be used as a last resort has missed both the updated research and the power of putting one in place earlier in retirement versus later.
Now more than ever, advisors need to learn every legitimate strategy available to preserve and protect their clients’ retirement while keeping their own practice relevant and expanding.
Reverse mortgages may not always be the right conclusion, but they should certainly be a part of any serious retirement conversation. The journey of a lifetime necessitates a well-planned and investigated strategy for the future. Find out how the best years are yet to come for your clients through the proper, planned use of the reverse mortgage. Learn more at: www.HousingWealth.net or www.HECMInstitute.com
© 2018 Ash Brokerage LLC.