A Social Security Bridge Strategy Advisors Overlook

Reverse mortgages, at least in Mills experience collaborating with financial advisors, are not commonly being used as last-resort strategies among the most cash-strapped retirees who have no other income sources apart from their home. More often, a reverse mortgage is used as part of a carefully crafted financial plan, developed in collaboration with a certified financial planer or fiduciary advisor, to help mass affluent individuals achieve more lofty financial goals.

One of these goals, Mills says, is bridging from a retirement at age 62 or 65 to the full Social Security retirement age of 70. Many mass affluent individuals, he explains, will be able to meet their early retirement living expenses by coupling withdrawals from private savings, workplace DC retirement plans and payments coming from a reverse mortgage.

“There is just a ton of wealth locked away today in home equity among the mass affluent,” Mills says. “Many people in this client segment bought houses 15 or 20 years ago for, say, $250,000, and they have since seen the value of their home climb by two or three times. That’s a huge asset, and it’s worth asking how you can tap into it without an outright sale of the house.”

Mills says there are certain regions in the U.S. where this strategy is particularly relevant, given what has happened in those housing markets over the past decade or two.

“Based on my experience, this strategy is most commonly utilized in those areas that have high-value homes concentrated within or near major metro areas, so think places like Baltimore, Chicago, Denver and pretty much any city in California,” Mills says.

Mills says financial planners are warming to the concept of at least considering the use of reverse mortgages as part of their holistic planning efforts for clients. Gone, he says, are the days when reverse mortgages were seen as “an opportunity for the bank to steal grandma’s house.”

“I like to say that advisors should think about a firm like ours as a third-party partner, the same way they might view working with a tax expert or an estate planning attorney,” Mills says.

Given the current market volatility, Mills says, more advisors are also asking about the opportunity to use reverse mortgages as a means of mitigating sequence of returns risk.

“It is really appealing to think about taking income from your home equity rather than having to make withdrawals from the 401(k) plan when it is down 25%,” Mills concludes.