By Karen DeMasters
A new type of reverse mortgage may be one key to enabling retirees to preserve portfolios and keep less cash in reserve, says Harold Evensky, a financial planner and nationally recognized expert on retirement issues.
The new federally insured Home Equity Conversion Mortgage, or HECM Saver, allows holders to establish a credit line but not draw on it unless the funds are needed. Payments on interest can be made when the holder chooses to do so or they can be deferred until the home is sold.
Unlike traditional reverse mortgages that provide a lump sum payment, the HECM can provide cash when needed, such as when the markets are down. This prevents the stockholder from having to sell stocks at a loss to get cash. The HECM can then be paid back when the markets are back up, Evensky says, which preserves the portfolio.
The new reverse mortgage is one factor changing the face of retirement planning, says Evensky of Evensky & Katz, a wealth management firm in Coral Gables, Fla. Evensky recently presented his view of changes in retirement planning at a webinar, The Future Ain't What It Used to Be: The Ultimate Guide to Retirement Planning for Baby Boomers.
Each day 10,000 baby boomers turn 65 and that will continue for the next 19 years, which makes the subject of retirement planning crucial, says Evensky, and that planning needs to reflect some changes.
"We are studying this (HECM Savers) now, but I'm reasonably positive it will become an important part of our planning in the future," Evensky says.
The use of HECM Savers can reduce the cash reserve that Evensky would recommend a retiree hold from two years of living expenses to six months because there is the HECM money to draw on if needed.
A HECM is also substantially less expensive than reverse mortgages have been, thereby providing a ready pool of capital to tap into when needed at a relatively low cost, he says.
"When markets regain their strength, the mortgage can be paid back," Evensky adds. "Our studies indicate this will significantly increase the survivability of the portfolio in retirement."
Another factor changing retirement planning is the increased use of immediate annuities, Evensky says. An immediate annuity provides regular, lifelong payments guaranteeing an income flow the buyer can't out live.