Wade Pfau Reverse Mortgage: A Smart Retirement Income Plan

A reverse mortgage can be a smart addition to your retirement income plan, especially if you own a home with significant equity.

The idea of a reverse mortgage is simple: you borrow money using the equity in your home as collateral, and you don't have to pay back the loan until you pass away, sell your home, or move out.

Wade Pfau, a well-known retirement expert, has written extensively on the benefits of reverse mortgages for retirees.

By tapping into your home's equity, you can create a steady stream of income to supplement your retirement savings.

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A reverse mortgage is a loan that lets you borrow money from your home and not have to pay it back until the end of the loan. About 90 percent of reverse mortgages are represented by the Federal program of Home Equity Conversion Mortgages (HECM).

You can borrow a percentage of your appraised home value, and the amount you can borrow depends on your age and current interest rates. Reverse mortgages actually benefit from low interest rates.

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A HECM gives you access to a line of credit to tap into, which increases over time. This line of credit cannot be frozen or canceled, and you have access to it for as long as you choose to remain living in the home.

The benefit of a reverse mortgage is that it gives you more options for spending, so you don't have to draw from certain assets during bad times. For example, if most of your retirement income is coming from equities, you don't want to pull that income out while the market is down.

The amount you can borrow from a reverse mortgage can actually grow over time, even if you don't borrow any money. This is because the loan balance would have grown, and the line of credit can actually be bigger than the value of the home by the time you're around 87 years old.

Reverse mortgages are non-recourse, meaning the lender cannot ask for more than the house's appraised worth. If the house is worth $500,000 at the time the loan comes due, that's the upper limit of the loan.

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A reverse mortgage can be used in various ways, with 14 different ideas ranging from using the home equity quickly to using it more slowly or never at all.

The key to understanding reverse mortgages is to consider the benefits of opening one early in retirement. With a Home Equity Conversion Mortgage (HECM), lower interest rates actually make retirement more affordable.

Opening a reverse mortgage early in retirement can be beneficial, especially with HECMs, where lower interest rates lead to a higher present value, allowing for a larger percentage of the home's value to be borrowed.

The amount of credit available from a reverse mortgage line of credit grows over time, even if you don't borrow from it. This is especially true if you open the line of credit early, allowing you to have more credit available than waiting until later.

Low interest rates favor HECMs, resulting in a larger initial principal limit, and even though subsequent growth may be lower, it can accelerate if interest rates increase.

Typical financial wisdom suggests using a reverse mortgage as a last resort, but this can be incredibly inefficient, as it often leads to waiting for the worst to happen and locking in losses.

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Spend home equity first to let your portfolio grow for longer before spending from it.

Opening a reverse mortgage line of credit early can allow you to have more credit available than waiting until later, according to recent research. This is because the amount of credit you can borrow grows over time, even if you don't borrow from it.

A reverse mortgage can be used to pay off an existing mortgage, reducing your expenses and making you less vulnerable to sequence risk.

Using a reverse mortgage as a last resort can be incredibly inefficient, as it's like waiting for the worst to happen. You're essentially locking in losses if you have to draw income from your portfolio during a market downturn.

Opening a reverse mortgage with a discretionary line of credit can give you options and extend the life of your account, allowing it to recover from market fluctuations.

Here are some strategies for using a reverse mortgage:

You can borrow from a reverse mortgage using different strategies, and one of them involves pulling out a fixed monthly income, which can help reduce what you're pulling from your investments and preserve them overall.

Dr. Pfau proposes a strategy that acts like a volatility buffer, giving you discretionary power to pull out income as you see fit, but other options are available.

There are two main strategies: one that helps with sequence of returns risk and another that helps reduce income risks fairly well.

The strategy Dr. Pfau proposes can be used to reduce income risks fairly well, but it's up to the individual to decide what works more synergistically with their assets and way of thinking.

You can use a reverse mortgage to pull out a fixed monthly income, which can help reduce what you're pulling from your investments and preserve them overall.

This strategy can help reduce income risks fairly well, but it's not the only option available.

Here are some key benefits of using a reverse mortgage to pull out a fixed monthly income:

Ultimately, it's up to the individual to decide what works more synergistically with their assets and way of thinking.

You can also use a reverse mortgage to act as a volatility buffer, giving you discretionary power to pull out income as you see fit.

This strategy can be used to reduce income risks fairly well, but it's not the only option available.

Here are some key benefits of using a reverse mortgage as a volatility buffer:

Opening a reverse mortgage as soon as possible can actually extend the life of your account significantly.

The initial costs of a reverse mortgage can be substantial, with mortgage insurance premiums, origination fees, and other closing costs potentially adding up to $20,000 or more.

However, these costs are a one-time expense, and the 2017 reforms have helped protect retirees from losing their line of credit by preventing lenders from canceling or blocking it.

Reverse mortgages are also non-recourse, meaning the lender can't ask for more than the house's appraised worth, which is a significant advantage.

It's essential to factor in these costs when considering a reverse mortgage, but it's also crucial to look at the bigger picture and how using it strategically can lead to a better outcome.

The Right Mindset is crucial when considering a reverse mortgage. It creates liquidity for an otherwise illiquid asset, allowing you to spend from your home equity when you otherwise wouldn't be able to.

Using a reverse mortgage wisely requires discipline and responsibility. If you're tempted to spend it because it's there, you may want to hold off and try to prevent yourself from getting into that situation.

A well-managed reverse mortgage can have a positive impact on your financial situation. If you can manage the responsibility of having all these funds available, but not just spending them because you can, that's really the key to making the most of it.

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