Reversing the Conventional Wisdom: Using Home Equity to Supplement Retirement Income

The overriding objective for many retirees is to maintain cash flow throughout their retirement years, to avoid “running out of money” in their later years. Cash flow survival is the central theme of this article.


  • This paper examines three strategies for using home equity, in the form of a reverse mortgage credit line, to increase the safe maximum initial rate of retirement income withdrawals.
  • These strategies are: (1) the conventional, passive strategy of using the reverse mortgage as a last resort after exhausting the securities portfolio; and two active strategies: (2) a coordinated strategy under which the credit line is drawn upon according to an algorithm designed to maximize portfolio recovery after negative investment returns, and (3) drawing upon the reverse mortgage credit line first, until exhausted.
  • A three-spreadsheet stochastic model is described, with one spreadsheet incorporating each strategy. The three spreadsheets are run simultaneously, with the same investment performance and withdrawal amounts in each. The cash flow survival probability over 30 years is determined for each strategy, and the comparisons are presented graphically for a range of initial withdrawal rates. We find substantial increases in the cash flow survival probability when the active strategies are used as compared with the results when the conventional strategy is used. For example, the 30-year cash flow survival probability for an initial withdrawal rate of 6 percent is only 55 percent when the conventional strategy is used, but is close to 90 percent when the coordinated strategy is used.
  • The model also shows that the retiree’s residual net worth (portfolio plus home equity) after 30 years is about twice as likely to be greater when an active strategy is used than when the conventional strategy is used.


Read the full article on the Financial Planning Association’s website >

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