Reverse Mortgage Strategy Can Shield Retirees From Market Downturns: New Study

It’s time to stop viewing reverse mortgages as simply a means of last resort for mass-affluent retirees running out of money, according to Phil Walker, vice president of strategic partnerships at Finance of America Reverse.

They can be used as a strategy for risk mitigation while at the same time growing investment portfolios, he argues.

“This gives the wealth management industry “a reason to engage the [reverse lending industry],” he says.

For example, following a down market, “don’t take the next income draw from the portfolio — take it from the reverse mortgage.

“That will give you faster, more growth when the market rebounds” and “pulls a lot of risk from your existing retirement plan,” says Walker, who trains financial advisors on how reverse mortgages can benefit retirement plans.

That withdrawal strategy is among the findings in a study that he and two academics conducted, which was published in the Journal of Financial Planning in December.

Titled “To Reduce the Risk of Retirement Portfolio Exhaustion, Include Home Equity as a Non-correlated Asset in the Portfolio,” the white paper shows how tapping home equity with a reverse mortgage offers the most benefit for mass-affluent retirees.

On average, this group has about $500,000 to $1.5 million in investable assets, Walker says.

The withdrawal strategy “dramatically reduces retirees’ exposure to volatile markets,” Walker adds.

FAR, a leader specializing in reverse mortgages, is the country’s largest wholesale provider, according to Walker.

Traditionally, wealth management has viewed reverse mortgages cautiously as “all risk and no reward: [Most advisors] can’t sell [them]. They have to refer them away.

“But if the client has a bad experience, they can sue [the advisor] — and there’s no revenue to offset that risk,” says Walker, formerly an advisor with Merrill Lynch, Morgan Stanley Smith Barney and Raymond James.

Over the years, compliance concerns, abuses and lawsuits have cast reverse mortgages in a negative light.

Reverse mortgages, however, can be used “like annuities and insurance,” Walker says. But “compared to those products, they’re much cheaper.”

ThinkAdvisor recently held a phone interview with Walker, who is based in Visalia, California.

The reverse mortgage strategy that he and his colleagues discovered is “the easiest, cheapest alternative for those who need an alternate source of income” — while providing portfolio growth and “dramatic risk reduction.”

Here are excerpts from our interview;

THINKADVISOR: Your study points to “seismic changes” for the reverse lending industry, you say. What changes were needed?

PHIL WALKER: For a number of years, our industry has known we should be working with the wealth management community and the financial planning community at large.

What has held that back was their view from a compliance standpoint that engaging us was all risk and no reward: [Advisors] can’t sell reverse mortgages — they have to refer them away.

[But] if the client has a bad experience, they can sue [the advisor], and there’s no revenue to offset that risk.

What’s the most important finding in your white paper?

The study has proven that a majority of mass-affluent retirees, the group with roughly half a million dollars to $1.5 million in investable assets, could benefit substantially from doing the new withdrawal strategy that we discovered.

For those who need an alternative source of income, the easiest, cheapest alternative is tapping into the home equity and reverse mortgage.

It’s not just portfolio growth; there’s also dramatic risk reduction [that they’ll derive].

This kind of flew in the face of “if you do something to get more gain, you probably take on more risk and could lose money.”

Just how does the withdrawal strategy you’re espousing impact a portfolio?

What we discovered was that it dramatically reduces the retiree’s exposure to volatile markets.

Volatility is a risk to a retiree because as the markets move up and down, so does your income. This strategy removes a lot of that, which is why it’s so momentous.

We don’t touch the portfolio holdings, yet we see all this growth.

Please explain how the new withdrawal strategy actually works.

[It’s based on a 2012 discovery] that following a down market period, instead of taking the next draw from the portfolio, you take it from the reverse mortgage.

What we discovered is that this also reduces risk.

After a down market, instead of taking the next year’s income from the portfolio, let it sit there and rest. Instead, take the income draw from this alternative source — a reverse mortgage.

Please discuss the other big positive: more growth.

If you draw on the portfolio, you’re making it really hard to rebound because you took money out that could benefit from growth.

But if you leave it in, you’re getting substantially more growth. You still take the hit from the down market, but you just recover a whole lot faster. That was one of the findings in the new study.