Volume 15, Issue 1
27
Reverse Mortgages, Annuities, and Investments: Sorting Out the Options to Generate Sustainable Retirement Income Joseph Tomlinson, FSA, CFP,® is Managing Director of Tomlinson Financial Planning, LLC, in Greenville, Maine. Shaun Pfeiffer, Ph.D., CFP,® is an Associate Professor of Finance and Personal Financial Planning at the Edinboro University of Pennsylvania John Salter, Ph.D., CFP,® AIFA,® is an Associate Professor of Personal Financial Planning at Texas Tech University and a Partner and Wealth Manager at Evensky & Katz Wealth Management in Coral Gables, Florida and Lubbock, Texas.
Abstract This study examines the improvements in sustainable retirement income that can be generated by utilizing either of two options under the HECM reverse mortgage program—the tenure option and line of credit (LOC). For comparison, the study also analyzes the impact of utilizing a single-premium immediate annuity (SPIA) to generate retirement income. The base case for these comparisons is a systematic withdrawal plan that does not use reverse mortgage or annuity options. The study also examines the impact of combining reverse mortgage options and SPIAs. The reverse mortgage tenure option was shown to be particularly attractive, generating more income than a SPIA purchased with the same financial commitment. The LOC option generated less income than tenure with average interest rates remaining level, but came close to tenure under the assumption of future higher rates. Tests were also run with higher stock allocations for the retirement savings and with increases in the amounts of SPIAs purchased. The reverse mortgage options are most attractive for those who do not need to hold onto home equity for either a bequest or late-in-life spending.
Introduction Although the most popular financial planning approach for generating retirement income is systematic withdrawals, planners have other options that may be worth considering. Two such options are annuities and reverse mortgages. Such options may be particularly useful for clients whose finances are constrained and they need to either generate more retirement income or make the income more secure. The use of annuities has been studied extensively and we are beginning to see research on reverse mortgages as a retirement planning tool. But an issue for planners is how to choose among these two options plus systematic withdrawals, and another