[In order to solve large-scale challenges, it is important to remember that innovation—the creation of new solutions—not only involves technology. It can also come from changes in thinking, in mindset, and applying old ideas and tools anew. Especially when tackling difficult issues like the growing retirement challenges in America today, we need to open our minds to marshal all sources of ideas, approaches, perspectives and tools to better understand and be able to attack the problem.
In order to do that, we need to regularly refresh our thinking by uncovering and challenging assumptions and long hidden deep biases. It is here that we should be aware of the “expertise” trap of relying strictly to older embedded solutions and applications from our experience. Closed mindsets rely on what’s worked in the past and tend to do mental shortcuts of immediately deflecting or dismissing ideas and thereby missing the opportunity to uncover new and better client solutions. An open mindset recognizes that things change. Products can be applied differently or mixed with other tools or approaches to produce new outcomes.
With the scale of the retirement crisis in America and growing complexity of other areas like HNW family and business wealth, rethinking the traditional financial planning process and the creative use of financial tools becomes a growing priority. The Institute for Innovation Development will be starting an article series focusing on different financial products and financial planning processes to explore areas that may benefit from a re-examination. We decided to start with an interview of Institute member, Harlan Accola, National Director, Fairway Independent Mortgage Corporation, who is on a passionate mission to build awareness of the need to rethink reverse mortgages. Armed with facts and a ton of research, he argues for reverse mortgages as a key financial planning tool that can substantially address the growing retirement crisis and change the retirement experience for untold millions of clients.]
Bill Hortz: Why do you feel so strongly that reverse mortgages can play such a fundamental role in addressing the retirement crisis and change the outcomes for millions of retirees?
Harlan Accola: There is over $7.1 Trillion in home equity owned by seniors over the age of 62! Let’s put the size of this potential solution in context – there are currently outstanding over $1Trillion in car loans, over $1Trillion in student loans $1T, and in excess of $800B in credit card balances. The truth is that using the $7 trillion in home equity MUST be used in order to give baby boomers the retirement they need and want. Boston College Center for Retirement Research professors wrote a book called Falling Short—the Coming Retirement Crisis and What to Do About It where they demonstrated that the statistics are clear— without home equity we cannot get the baby boomers to the finish line even at normal 80s life expectancy!
The bad news is if they don’t do it as a preventive measure—they will be forced to do it in their 70s, 80s or 90s when they may not even qualify or be forced into a scenario that is not as effective as in an advanced retirement planning strategy. The evidence and research clearly show that the best time to get a reverse mortgage is when you are earlier in retirement.
Here is the bottom line—everyone has 3 buckets of wealth. Bucket 1 is their guaranteed monthly income that comes from Social Security, Pensions or Wages. Bucket 2 is their nest egg that is invested and managed by financial advisors for the most part. And Bucket 3 is the client’s home which is a significant part of baby boomers net worth.
If all three of these buckets are managed as one holistic group—the chance of all the money lasting longer goes up dramatically. Bucket 3 MUST be a part of the overall planning process beyond just turning to bucket 3 as a “loan of last resort” when all other buckets are depleted or become less when one person passes away.
Hortz: Can you discuss the scope and nature of that research on reverse mortgages and share with us a few top resources or studies that you recommend advisors should read?
Accola: The interesting thing about the hesitancy of the financial planning profession is that they have largely ignored the solid research done by those respected in their industry. It all started with Harold Evensky and John Salter at Texas Tech University Personal Finance Dept. Their findings were published in 2012 in the Journal of Financial Planning detailing using reverse mortgages to mitigate sequence of returns risk.