This case study compares the fortunes of two retirees who start retirement with identical securities portfolios, receive identical amounts of retirement income throughout a 30-year retirement and live in identical homes.
The study illustrates how a securities portfolio (such as a 401(k) account or a rollover IRA) that provides retirement income can be substantially helped by a reverse mortgage credit line. More specifically, when the credit line is used in coordination with the portfolio, instead of as a last resort, it prolongs the life of the portfolio and greatly increases the net worth (and the legacy) of the retiree.
In this case study, “John” has used the “last resort” strategy; he has exhausted his portfolio in his 24th year of a 30-year retirement and has built up a debt of nearly $539,000 against his home by the end of that 30-year retirement.
By contrast, “Jim” has used the coordinated strategy; he has a portfolio with more than $1 million at the end of a 30-year retirement and a debt of about $692,000 against his home. Thus at the end of the 30-year retirement, Jim has a net worth that is more than $900,000 greater than John has, even though both retirees started in identical financial situations and received identical amounts of retirement income.
The coordinated strategy is very simple: In each year directly following a year of negative investment returns in the portfolio, the portfolio is not drawn upon. Instead, the reverse mortgage credit line is drawn upon for the retiree’s income. In this strategy, the reverse mortgage credit line is used to offset the “adverse sequence of returns.”