Kiplinger\'s Personal Finance - 10.2019

58 KIPLINGER’S PERSONAL FINANCE^ 10/2019

portfolios to pay the bills.

The standby reverse mort-

gage strategy can be effective

“both from a practical and a

behavioral perspective,” says

Evensky. “If people know

they’ve got resources when

the market collapses, they

don’t panic and sell.”

A traditional home-equity

line of credit could also pro-

vide a source of emergency

cash, but you can’t count on

the money being there when

you need it, says Shelley Gior-

dano, founder of the Academy

for Home Equity in Financial

Planning at the University of

Illinois at Urbana Champaign.

During the 2008–09 market down-

turn and credit crunch, many banks

froze or closed borrowers’ home-

equity lines. “Just when people needed

money and liquidity, the banks needed

liquidity, too,” says Giordano. That

won’t happen if you have a reverse

mortgage line of credit. As long as you

meet the terms of the reverse mort-

gage—you must maintain your home

and pay taxes and insurance—your

line of credit is guaranteed.

Several factors make a standby re-

verse mortgage particularly attractive

now. Homeowners age 62 and older

have seen the amount of equity in

their homes increase sharply in recent

years, to a record $7.14 trillion in the

first quarter of 2019, according to the

National Reverse Mortgage Lenders

Association.

Low interest rates are another plus.

Under the terms of the government-

insured Home Equity Conversion

Mortgage, the most popular kind of

reverse mortgage, the lower the inter-

est rate, the more home equity you’re

allowed to borrow. 

Which leads us to one of the most

counterintuitive—and potentially lu-

crative—features of reverse mortgages.

Your untapped credit line will in-

crease as if you were paying interest

on the balance, even though you don’t

have to pay interest on money you

burdened with high fees—a common

problem with many 403(b) annuity

offerings. You may be better off invest-

ing your savings in low-cost mutual

funds or exchange-traded funds and

buying an immediate or deferred an-

nuity after you retire.

YOUR HOME

AS A SAFETY NET

Reverse mortgages have often been

branded as a way for older retirees to

raise money only when other sources

of retirement income have dried up.

But a growing group of financial plan-

ners and academics say that taking out

a reverse mortgage early in retirement

could help protect your retirement in-

come from stock market volatility and

significantly reduce the risk that you’ll

run out of money.

Here’s how the strategy, known

as a standby reverse mortgage, works:

Take out a reverse mortgage line of

credit as early as possible—homeown-

ers are eligible at age 62—and set it

aside. If the stock market turns bear-

ish, draw from the line of credit to

pay expenses until your portfolio

recovers. Retirees who adopt this

strategy should be able to avoid the

pitfalls of the Great Recession, when

many seniors were forced to take

money out of severely depressed

RETIREMENT

them, and if they fall, you’ll

have locked in payments at the

higher rate.

Another option that requires

a smaller outlay of cash is a de-

ferred annuity, also known as

a longevity annuity. With this

annuity, you get guaranteed

payments when you reach

a certain age. For example, a

65-year-old man who invests

$100,000 in a deferred annuity

that starts payments when he

turns 80 would receive about

$1,850 a month, according to

ImmediateAnnuities.com.

You can invest up to 25% of

your IRA or 401(k) account (or

$130,000, whichever is less) in

a type of longevity annuity known as

a qualified longevity annuity contract

(QLAC) without having to take re-

quired minimum distributions when

you turn 70½. Deferred annuity pay-

outs are also tied to interest rates, so if

you believe rates are going to rise, you

may want to postpone investing in one

of these annuities.

Depending on the type of retire-

ment plan you have, you may already

own an annuity. Many teachers and

other public service employees have

variable annuities in their 403(b) re-

tirement savings plans. These annui-

ties invest in mutual funds and can be

converted into an annuity that pro-

vides income in retirement.

Legislation pending in Congress

would make it easier for 401(k) plan

providers to offer annuities to plan

participants by eliminating some of

the liability risks for the employer.

The legislation would also make these

annuities portable, allowing job

changers to transfer annuities to an-

other employer’s plan or an IRA with-

out paying surrender charges.

Supporters of the law say it would

help workers convert their savings

into lifetime payouts when they retire.

But critics say the legislation doesn’t

go far enough to prevent employers

from offering complex variable and

equity-indexed annuities that are

Pre-

retirement

income

Income

from

savings

Income

from Social

Security

Income

replacement

rate

$75,000 $33,750 $22,500 75%

100,000 45,000 27,000 72

150,000 67,500 30,000 65

200,000 90,000 32,000 61

300,000 132,000 33,000 55

Cash Flow

Sources of Income

This is how much retirees rely on savings and Social Security

to replace their preretirement income.

SOURCE: Fidelity Investments