Page 36 - Investment Advisor May 2021

Retirement Planning

Why Larry Kotlikoff

Changed His Mind on

Reverse Mortgages

The retirement expert was

skeptical of these loans but

now thinks retirees should

give them a second look.

By Ginger Szala

everse mortgages are a controversial source of retire- still own their home and they must pay taxes, insurance and
ment cash flow. The loans can come with high fees, upkeep on the home.
R can place a burden on heirs and can be a vehicle for Some other positive RM aspects were pointed out by Tom
unscrupulous lenders to defraud seniors. But others liken it to Dickson of Financial Experts Network, who hosted the webinar:
an annuity that provides free rent long after the house is paid • An RM allows a client to convert that home equity, or
off. This group includes economist Larry Kotlikoff, who was a “trapped equity,” into tax-free cash.
guest on a recent webinar discussing reverse mortgages. • The most popular form of RMs (99%) are those backed by
A onetime opponent, he now has changed his mind. federal government.
“I was always very skeptical, probably because [RMs] seemed • For couples, only one partner must be 62 or older to
complicated and I always worried about the issue of people hav- qualify. Those age 60 and older can qualify for proprietary
ing to move and having to pay back what I thought was going reverse mortgages (or jumbo RMs).
to be a big bill,” Kotlikoff said in the webinar. “[However] the • Single-family homes, condos, townhomes and 2-4 unit
median home equity of people 65 and older is about $150,000 apartment buildings (with owner occupying one unit) are
[and] that’s a big number compared to their net worth.” eligible. The home must be a primary residence.
With a RM, that “trapped” home equity can be utilized. • No monthly payment is required.
Morningstar’s Director of Retirement Research David • This is the only residential loan that comes with non-recourse
Blanchett was equally positive: “Conceptually, they (obviously) protection, usually a factor in commercial loans. For example,
make a lot of sense,” he told Investment Advisor in an email. “The a couple lives in a home until they die. When their heirs sell
home is one of the largest assets for many retirees, and therefore the home for more than what it costs to pay off the RM, they
being able to utilize that asset to fund retirement spending is keep the proceeds of the sale. If the RM is larger than what
something that should be considered, especially since it enables they can sell home for, the heirs (or even homeowners if still
the retiree to live in the house” for the rest of their life. living) would not be responsible for making up that deficit —
that’s where the Federal Housing Administration comes in.
Pros and Cons Also, RMs come with some safeguards:
To do an RM, clients must be 62 or older and have 50% equity • If the client wants to repay the loan at any time, there is
in their home (for a government-protected RM). Yet they no additional cost;

34 INVESTMENT ADVISOR MAY 2021 | ThinkAdvisor.com