Sequence of Returns risk in retirement is a big concern and a reverse mortgage line of credit can be used so money is drawn from the market only when it is up. Since the reverse mortgage line of credit is a great buffer asset, it allows you as the advisor to keep all the assets fully invested focused on longer-term gains. When market downturns come, the RM serves as a cash account. Tax-free withdrawals from a reverse mortgage are a popular way to pay taxes on a Roth conversions or NUA taxation. When it comes to delaying social security, paying health and long term care costs, or doing tax-free gifting to family members, a reverse mortgage works much better than IRAs or other taxable funding options.
The 2017 Tax Cuts and Job Act left a wonderful pathway for decreasing taxes on qualified retirement funds. Interest on Acquisition indebtedness is the only interest that is still left as deductible. But because of the new larger standard deductions, most retirees have lost the ability to get an itemized tax deduction on their interest. However since you can pay interest optionally with a reverse mortgage—you can stack the interest and only pay it when it substantially exceeds your standard deduction—and get the full benefits of the interest deduction.
New home purchases come into play as well. When clients move to their retirement home, they only have to pay about half down to eliminate their payment for the rest of their lives. So if they are downsizing—extra money will become assets under management and if they are upsizing, no money will need to be taken out of their assets.
Pigeon holing reverse mortgages as a loan for the 80 or 90 year old widow who is broke is a very unfair label that needs to change. It will cause your clients to lose millions of dollars in opportunity costs and potential tax savings over their retirement years.
Hortz: What is your best advice to advisors to advisors that they should consider or reconsider how to use reverse mortgages in retirement planning?
Accola: My concern for advisors is that the ground breaking research on reverse mortgages and strategically using them in a wealth management plan is so overwhelmingly evident that there are may actually be legal implications to NOT talking to your client about properly using them. Jamie Hopkins, an attorney in the financial planning world, specifically wrote an article in Investment News about the dangers of ignoring something that increases wealth and retirement income AND decreases risk at the same time. Why would you not want your clients to know about this?
We all have a right to our own opinions but no one can make up their own facts. Adoption rates for reverse mortgages in early retirement planning are way too low. We ask advisors to put their own personal biases and past prejudices aside. The research is that cut and dried on this subject. The benefits to the client are the main reason to integrate reverse mortgages early into the retirement planning process.
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