Annuities

The 4 Key Advantages of HECMs in Income Planning


Annuities

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:

 

  • Income from HECMs is received tax-free. I talk a lot about the importance of what you keep verses what you earn. The use of tax-free income can be beneficial in many ways. First, it reduces combined income for Social Security taxation, which can provide relief for many middle Americans. With means testing on Medicare, a slight reduction under a tax threshold can create as much as a $1,800 difference in medical premiums. Paying attention to client incomes and potential thresholds will become an important planning criteria as health care becomes more difficult to predict. 

 

  • HECM lines of credit grow annually. If set up properly, a HECM credit line grows between 4 percent and 6 percent annually under current interest rate environments. If you qualify for a $200,000 credit line at age 62, it will grow to more than $525,000 at age 82. That pool of money is available for any purpose, at any time, with no taxation, regardless of the value of the home. Because the newer HECM products are non-recourse loans, the client does not risk losing their home if the local real estate market doesn’t grow accordingly.  

 

 

  • HECM for Purchase strategies can allow retirees to move to a more appropriate home without increasing their mortgage payments. One of the most neglected client conversations is the discussion around where they will live in retirement. With longevity increasing, many of our clients will not want to live in the same multi-story home where they raised their kids. At the same time, they are not willing to add more expense to an already compressed income after their working years. So, a HECM for Purchase allows a new home to be purchased without a traditional amortization schedule. 

 

 

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.  

 

Winning Strategy

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. 

 

Learn More

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.

Download the e-Book Here!

 

*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 

About the Author

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.”

HECM Retirement Housing Wealth

The Parable of the Reserve Tank


Annuities

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.

The Unexpected Discovery – The Journey continues

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.

The Real Discovery

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.

Here’s what they found out:

  • The main gas tank would take the vehicle about 500 miles
  • Turning on the reserve gas tank after the main tank was about to run out only added about 25 miles 
  • To their surprise, if they had used the reserve tank FIRST and THEN switched to the main tank, the vehicle would have gone about 680 miles
  • If they had switched back and forth between the two tanks, depending on outside conditions, they could have gotten 700 miles

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.

 

The Biggest Surprise Yet!

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. 

 

No More Loan of Last Resort

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. 

 

How Can an Advisor Learn More?

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   

 

HECM Reverse Mortgages Don Graves