Reverse Mortgages Reduce Risk for Retirees While Increasing Wealth

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Two of the biggest risks retirees face are from longevity and the market. It is the job of their financial advisor to help mitigate those risks through strategies such as diversification. It has long been considered an advisor’s fiduciary responsibility to engage in the practices of asset allocation and portfolio diversification, first introduced by Harry Markowitz in his 1952 essay “Modern Portfolio Theory.”

However, a new study, which I co-authored, proves that a withdrawal strategy utilizing a reverse mortgage reduces market risk and increases portfolio growth. The study, published in the Journal of Financial Planning, reported that this strategy benefit mass-affluent investors.

The study focuses on 20 million retirees in the United States who are part of the baby boomer generation and have their primary source of retirement income from 401(k) accounts or other securities portfolios with values in the range of $500,000 and $1.5 million, and who own their home and have little or no mortgage debt against it.

The study (To Reduce the Risk of Retirement Portfolio Exhaustion: Include Home Equity as a Non-Correlated Asset in the Portfolio) reported that volatility is a risk for retirees:

For clients who are in mid-career and are building wealth (i.e., not distributing from their portfolios), short-term volatility generally does not present a significant risk. By contrast, for clients who are retired and are distributing primarily from a securities portfolio for their normal living expenses, short term volatility is risk.

The impact of a bad market year reduces the size of a retiree’s portfolio and their income, assuming they are not increasing their withdrawal rate to compensate, which would exacerbate the problem.