Sequence of Return Risk

Borrowers can set up tenure payments which provide a fixed monthly distribution for the life of the loan. Term payments are fixed monthly distributions for a designated period of time. Lump sum distributions are when borrowers receive a total amount when the loan closes. A line of credit can be set up which gives borrowers future access to funds. Funds can be distributed in any one of these methods or in a combination of various methods.

A reverse mortgage line of credit under the HECM program allows retired homeowners to access the equity in their homes without making monthly payments as you do with other products like a home equity line of credit (HELOC). The available balance of a reverse mortgage line of credit grows over time at the same rate as the interest rate on the loan ¹, giving borrowers access to more funds as time passes. 

According to a study by economists Wade Pfau, Barry Sacks, and Jon Salter, setting up a reverse mortgage as a line of credit early in retirement can improve the longevity of a portfolio². This is because the line of credit can be used to mitigate the impacts of sequence of returns risk (the risk of incurring portfolio losses). In years where the portfolio incurs negative returns, the holder of a reverse mortgage with a line of credit feature may significantly reduce their sequence of return risk on their portfolio by utilizing the cash available on the line of credit. 

Employing the following techniques independently or in conjunction with each other can significantly reduce your sequence of returns risk:

1.  Spend Conservatively
2. Maintain Spending Flexibility
3. Reduce Volatility (When It Matters Most)
4. Buffer Assets – Avoid selling at Losses

This strategy can help improve clients’ retirement sustainability and build a larger legacy to leave their heirs. Strategic use of the line of credit feature in a reverse mortgage gives borrowers an additional tool to manage their assets and reduce the impact of market volatility and inflationary pressures. Consulting with a knowledgeable professional to explore these benefits is critical to determine if this product can assist you. 

Footnotes:

1. The rate of growth on the HECM is the interest rate plus the monthly MIP premium, .5%, compounded over time. See Reverse Mortgage Line of Credit Growth Feature.
2. “Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement” (Retirement Research Media, 2016)