Why A Reverse Mortgage Does Not Cost Too Much
Many critics will tell you that a reverse mortgage cost too much. Mind you, most of those critics have never studied reverse mortgages and are relying on misinformation to form an opinion. I wanted to share with you some great information provided by Wade D. Pfau, Ph.D. Wade D. Pfau, Ph.D. CFA, is a professor of retirement income in the Ph.D. program in financial services and retirement planning at The American College in Bryn Mawr, PA. He wrote a great article entitled What the Critics Get Wrong About Reverse Mortgages. This article was posted to Advisor Perspectives, a website for the financial planning community.
In the article, Pfau talks about the cost associated with a reverse mortgage relative to an overall retirement objective. When used by itself, one needs to realize the cost is designed to help in a long term retirement. Since the average retiree spends roughly 22 years in retirement, the cost annualized is minimal.
“The power of a reverse mortgage to help preserve an investment portfolio in retirement can be viewed in any number of ways. For instance, a reverse mortgage could be used to refinance a traditional mortgage to avoid making mortgage payments in the key early years of retirement; it could be used to build a bridge to support the delay of Social Security benefits without taking excess distributions from an investment portfolio; or it could be used to coordinate distributions from an investment portfolio to avoid creating greater pressure on the portfolio when markets are looking bleak.”
By utilizing a strategy of advancing funds from a Reverse Mortgage when the market is down, the homeowner in his case study had roughly $183,000 more in wealth at the end of the process than one that did not. Even after allowing for financing cost. See the charts from his case studies below.
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Scenario 1
Retiree does not use a HECM reverse mortgage
| Age | IRA Distribution | HECM Distribution | IRA Balance | Home Value | HECM Loan Balance | Net Worth: IRA + Home – Loan |
| $1,000,000 | $200,000 | $0 | $1,200,000 | |||
| 65 | $40,388 | $0 | $933,846 | $201,616 | $0 | $1,135,463 |
| 66 | $41,741 | $0 | $1,003,574 | $204,875 | $0 | $1,208,449 |
| 67 | $43,010 | $0 | $1,035,488 | $215,224 | $0 | $1,250,712 |
| 68 | $45,040 | $0 | $944,689 | $231,270 | $0 | $1,175,959 |
| 69 | $47,792 | $0 | $990,489 | $248,938 | $0 | $1,239,427 |
| 70 | $50,416 | $0 | $1,048,322 | $259,917 | $0 | $1,308,240 |
| 71 | $52,110 | $0 | $1,116,456 | $265,592 | $0 | $1,382,047 |
| 72 | $53,887 | $0 | $1,009,175 | $276,039 | $0 | $1,285,214 |
| 73 | $58,629 | $0 | $851,784 | $307,354 | $0 | $1,159,138 |
| 74 | $65,781 | $0 | $962,972 | $324,844 | $0 | $1,287,816 |
| 75 | $70,393 | $0 | $1,056,412 | $352,154 | $0 | $1,408,566 |
| 76 | $73,778 | $0 | $954,285 | $403,688 | $0 | $1,357,972 |
| 77 | $78,773 | $0 | $919,506 | $467,865 | $0 | $1,387,370 |
| 78 | $85,887 | $0 | $927,526 | $525,073 | $0 | $1,452,599 |
| 79 | $97,318 | $0 | $981,016 | $565,602 | $0 | $1,546,618 |
| 80 | $109,385 | $0 | $891,416 | $595,952 | $0 | $1,487,368 |
| 81 | $119,165 | $0 | $967,284 | $602,121 | $0 | $1,569,405 |
| 82 | $123,776 | $0 | $969,696 | $627,789 | $0 | $1,597,485 |
| 83 | $128,480 | $0 | $926,558 | $660,151 | $0 | $1,586,709 |
| 84 | $133,555 | $0 | $1,001,127 | $710,556 | $0 | $1,711,684 |
| 85 | $138,590 | $0 | $1,007,487 | $776,359 | $0 | $1,783,846 |
| 86 | $140,156 | $0 | $902,588 | $838,339 | $0 | $1,740,928 |
| 87 | $146,337 | $0 | $842,880 | $897,684 | $0 | $1,740,564 |
| 88 | $152,805 | $0 | $844,584 | $928,142 | $0 | $1,772,726 |
| 89 | $159,910 | $0 | $707,131 | $919,989 | $0 | $1,627,120 |
| 90 | $169,681 | $0 | $661,091 | $926,191 | $0 | $1,587,282 |
| 91 | $174,873 | $0 | $522,344 | $931,510 | $0 | $1,453,855 |
| 92 | $179,944 | $0 | $378,746 | $955,676 | $0 | $1,334,422 |
| 93 | $184,893 | $0 | $190,141 | $976,881 | $0 | $1,167,022 |
| 94 | $189,829 | $0 | $396 | $992,270 | $0 | $992,666 |
Scenario 2
Retiree uses a HECM reverse mortgage to protect investment portfolio
| Age | IRA Distribution | HECM Distribution | IRA Balance | Home Value | HECM Loan Balance (Amount Due) | Net Worth: IRA + Home – Loan |
| $1,000,000 | $200,000 | $0 | $1,200,000 | |||
| 65 | $40,388 | $0 | $933,846 | $201,616 | $0 | $1,135,463 |
| 66 | $41,741 | $0 | $1,003,574 | $204,875 | $0 | $1,208,449 |
| 67 | $43,010 | $0 | $1,035,488 | $215,224 | $0 | $1,250,712 |
| 68 | $45,040 | $0 | $944,689 | $231,270 | $0 | $1,175,959 |
| 69 | $47,792 | $0 | $990,489 | $248,938 | $0 | $1,239,427 |
| 70 | $50,416 | $0 | $1,048,322 | $259,917 | $0 | $1,308,240 |
| 71 | $52,110 | $0 | $1,116,456 | $265,592 | $0 | $1,382,047 |
| 72 | $53,887 | $0 | $1,009,175 | $276,039 | $0 | $1,285,214 |
| 73 | $58,629 | $0 | $851,784 | $307,354 | $0 | $1,159,138 |
| 74 | $0 | $65,030 | $1,043,564 | $324,844 | $71,852 | $1,296,556 |
| 75 | $70,393 | $0 | $1,151,797 | $352,154 | $78,283 | $1,425,668 |
| 76 | $73,778 | $0 | $1,046,917 | $403,688 | $84,960 | $1,365,645 |
| 77 | $78,773 | $0 | $1,016,793 | $467,865 | $94,332 | $1,390,326 |
| 78 | $85,887 | $0 | $1,035,773 | $525,073 | $107,661 | $1,453,186 |
| 79 | $97,318 | $0 | $1,108,926 | $565,602 | $123,401 | $1,551,127 |
| 80 | $109,385 | $0 | $1,022,230 | $595,952 | $149,167 | $1,469,015 |
| 81 | $119,165 | $0 | $1,131,135 | $602,121 | $175,793 | $1,557,463 |
| 82 | $123,776 | $0 | $1,158,059 | $627,789 | $197,978 | $1,587,870 |
| 83 | $128,480 | $0 | $1,134,030 | $660,151 | $226,408 | $1,567,774 |
| 84 | $133,555 | $0 | $1,263,051 | $710,556 | $252,671 | $1,720,936 |
| 85 | $138,590 | $0 | $1,313,427 | $776,359 | $279,353 | $1,810,432 |
| 86 | $140,156 | $0 | $1,220,964 | $838,339 | $305,891 | $1,753,412 |
| 87 | $146,337 | $0 | $1,197,726 | $897,684 | $339,172 | $1,756,238 |
| 88 | $152,805 | $0 | $1,278,880 | $928,142 | $381,705 | $1,825,317 |
| 89 | $159,910 | $0 | $1,155,672 | $919,989 | $426,288 | $1,649,373 |
| 90 | $169,681 | $0 | $1,212,819 | $926,191 | $469,641 | $1,669,369 |
| 91 | $174,873 | $0 | $1,115,065 | $931,510 | $503,268 | $1,543,308 |
| 92 | $179,944 | $0 | $1,034,384 | $955,676 | $536,936 | $1,453,124 |
| 93 | $184,893 | $0 | $833,224 | $976,881 | $577,743 | $1,232,361 |
| 94 | $189,829 | $0 | $817,851 | $992,270 | $633,784 | $1,176,336 |
