Reversing the Conventional Wisdom

One of the biggest concerns retirees have is running out of money during their retirement years.

A significant risk factor affecting whether retirees will be able to maintain their cash flow is negative investment returns during the early years of retirement. Losses in the early years, plus the withdrawals taken during those years, can lead to an investment portfolio that simply doesn’t have enough assets to recover in the later “up” years.

A financial product that’s been around for a while is a reverse mortgage. This is a home loan that typically provides monthly cash payments based on a retiree’s age and home equity. Payments on this loan aren’t required while the homeowner is alive and lives in the home. Reverse mortgages have generally been used as a “last resort” for retirees who are close to running out of money.

A new and much better approach has recently been developed. It’s called a “coordinated strategy.” Instead of waiting until retirees get close to exhausting their savings, they establish a reverse mortgage line of credit early in retirement. And then, at the end of each year, they decide whether during the coming year they’re going to withdraw funds from their investment accounts, or use their reverse mortgage. Essentially what happens is that following the “up” years, retirees withdraw funds from their portfolio. And after the “down” years, they draw against their reverse mortgage.

A new study has shown that utilizing this approach over a 25 to 30 year retirement can increase retirees’ chances of remaining solvent by up to 70%! And using the reverse mortgage as a “last resort” only increases their chances by about 8%.

If you would like to learn more about this interesting new concept, or just discuss retirement planning in general, please give me a call.

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