Reverse mortgages are becoming more mainstream. But to benefit from using one, you need to understand how to incorporate it into a responsible retirement income plan. So exactly what is a reverse mortgage? What role should it fill in your retirement planning? And should you open a reverse mortgage early or as a last resort? 

https://www.youtube.com/watch?v=fph0k20tHXc

To answer your questions, we’ve invited back a special guest, Dr. Wade Pfau. Dr. Pfau is the author of Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement, and host of Retirement Researcher. He shares his significant work on retirement income planning to shed some light on reverse mortgages. 

To learn how to get the most retirement income with reverse mortgages, so you can enjoy your money and your life the most… tune in now!

Table of contentsWhy Retirement Income?What is a Reverse Mortgage?Different Strategies for Borrowing When Should You Use a Reverse Mortgage?The Right MindsetAre Reverse Mortgages Expensive?Connect with Dr. Wade PfauAbout Dr. Wade PfauBook A Strategy Call

Why Retirement Income?

[4:50] “I was interested in retirement income planning, it really just evolved from research I did in grad school… There was a proposal in the early 2000s to privatize part of Social Security, and I was investigating how that might work out in practice, and that's really translated into what I do today in terms of personal retirement planning. But then, in that regard, I really built a career around this insight that is not fully understood yet in the general population, which is when you're retired, investment risk changes. When you're spending from assets, you're more exposed to investment volatility.”

This volatility in retirement means opens retirees up to a wide variety of income strategies that can increase the longevity of assets and income. However, many typical financial talking heads consider these strategies unconventional, and many people don’t know how to use them properly.

One of those misunderstood assets is home equity, and subsequently, reverse mortgages. However, when used strategically, these elements can really make your retirement income far more efficient. 

What is a Reverse Mortgage?

A reverse mortgage, as Dr. Pfau shares, is when you borrow money from the home and don’t 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). They issued the first HECMs in the late 80s, and the government is consistently working to ensure that the program is operating as well as it can. 

The amount you can borrow from your home depends on your age and the current interest rates, and reverse mortgages actually benefit from low interest rates. A HECM gives you access to a percentage of your appraised home value.

What the reverse mortgage actually does is give you a line of credit to tap into. This line of credit increases over time. And unlike a regular home equity line of credit, a HECM cannot be frozen or canceled. You have access to it for as long as you choose to remain living in the home. Once you move out of the home, the loan balance becomes due.

The benefit of a reverse mortgage is that it gives you more options for spending. That way, 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. A reverse mortgage is just one way to create that flexibility.  

Different Strategies for Borrowing 

The strategy Dr. Pfau proposes acts more like a volatility buffer by giving you discretionary power to pull out income as you see fit. However, there are other reverse mortgage strategies. For example, there are reverse mortgage options to pull out a fixed monthly income. 

While this monthly income doesn’t help with a specific sequence of return...