Reverse mortgages: Their time has come - Austin American-Statesman

Reverse mortgages are the Rodney Dangerfield of financial planning tools. Long thought of as something retirees used in last-ditch efforts to stay in their home, they were seen more as leaky lifeboats than as financial planning tools. They were badges for people soon to be broke.

But all that might be changing.

If a recent Journal of Financial Planning paper gets traction, the use of reverse mortgages will move from people who are desperate to practical people who have both home equity and some financial assets.

This will happen for a totally unexpected reason: Retirees can use a reverse mortgage as a tool for increasing the probability that they won't outlive their assets while increasing their retirement spending.

In other words, if reverse mortgages are used early, rather than late, they can be as important in the retirement planning toolbox as life annuities.

Barry Sacks, a San Francisco tax attorney and Stephen Sacks, a professor emeritus of economics at the University of Connecticut (and brother of Barry Sacks), made this discovery by thinking differently about financing retirement.

Rather than waiting until assets were exhausted and then taking a reverse mortgage, they asked: What if retirees took out a reverse mortgage first. This would let them to use withdrawals from the reverse mortgage to delay or reduce withdrawals from financial assets.

None of this matters, they found, if the retirement income withdrawal rate was set at an initial 4 percent, with the amount adjusted upward for inflation in each succeeding year. In that case, there was a 90 percent chance that investment money alone would last through 30 years of retirement.

Things change, however, when you up the withdrawal rate, as many retirees need to do.

Taking a 6 percent withdrawal rate and using a reverse mortgage first or early, for instance, provided an 80 percent probability of "cash flow survival" for 30 years, while using a reverse mortgage last provided only a 50 percent probability of cash flow survival.

Similarly, taking a 6.5 percent withdrawal rate and using a reverse mortgage first or early provided a 70 percent probability of cash flow survival for 30 years, while using a reverse mortgage last provided only a 40 percent probability of cash flow survival.

Surprisingly, this enormous increase in retirement income seldom comes at the expense of net estate value. In a majority of cases, the Sacks brothers found that net worth at the end of 30 years (remaining home equity and remaining retirement assets value) was greater as often as three-fourths of the time.

In other words, you can eat cake and still pass some on to your kids or favorite charity, too.

Scott Burns is a nationally syndicated columnist who has been writing about personal finance since 1977. Send questions to business@statesman.com.