Wade Pfau’s article Incorporating Home Equity into a Retirement Income Strategy describes six methods for incorporating home equity into a retirement income strategy through a reverse mortgage.
Generally, strategies that spend the home equity more quickly increase the overall risk for the retirement plan. More upside potential is generated by delaying the need to take distributions from investments, but more downside risk is created because the home equity is used quickly without necessarily being compensated by sufficiently high market returns.
Opening the line of credit at the start of retirement and then delaying its use until the portfolio is depleted creates the most downside protection for the retirement income plan. This strategy allows the line of credit to grow longer, perhaps surpassing the home’s value before it is used, providing a bigger base to continue retirement spending after the portfolio is depleted.
Use of tenure payments or one of the coordinated spending strategies can also be justified as providing a middle ground, balancing the upside potential of using home equity first and the downside protection of using home equity last.
Clients receive the best value when opening a reverse mortgage line of credit at the earliest possible age.
Read the full article on the Financial Planning Association’s website. >>