Who Should Get a Reverse Mortgage and Why

Based on the hundreds of loans that I have done for clients the most common reason people get a reverse mortgage is because they are currently facing or will soon be facing some sort of financial hardship.

These hardships are usually a loss of a spouse, loss of income, low income and depleted or quickly depleting retirement accounts. In almost every situation the mortgage payment(s) along with consumer debt has become unbearable at best and unsustainable at worst.

In most cases, the people I help get reverse mortgages are doing so because they have no other options, have very little to nothing left over at the end of the month or in some cases, are utilizing credit cards to supplement their income. They are broke or will be broke in the near future.

They are getting the reverse mortgage because they realize a financial storm is coming or they are tired of struggling and just need some financial relief. Why wouldn’t they? Especially if they could free up $500, $1000, $1500 or more of their income. Going from having nothing left over at the end of the month to an extra $500 or more in cash every month while still being able to live in their home is life changing.

Think about this. If most of my clients are getting reverse mortgages due to financial hardship. I am sure you would agree that it is safe to assume most people across the nation are getting reverse mortgages for the exact same reasons.

Your answer to “Who should get a reverse mortgage?” would be, anyone that is facing financial hardship. Is there anything wrong with utilizing the reverse mortgage this way? Absolutely not. In fact, those situations are the exact reason the reverse mortgage was created.

If most people get a reverse mortgage because of financial hardships; wouldn’t it be easy to assume that the purpose of the loan is to help people facing hardships? Of course it is.

If your assumption about reverse mortgages and who should get one, is that they are for people in financial hardships and you are doing just fine financially, would you ever consider the reverse mortgage as an option? Probably not.

That last question is really where the problem lies with the reverse mortgages. People only consider it when they are in a financial bind. If people truly understood what the reverse mortgage is, how it works and the strategic uses during retirement; I believe there would be more people with a reverse mortgage in retirement than without.

But first we need to look at who should get a reverse mortgage and the basic reasons why. Don’t get hung up on these very basic ideas and strategies, they are covered in depth.

Three Categories of People Who Should Get a Reverse Mortgage and Why

There are three general categories of borrowers that should consider a reverse mortgage. These categories include borrowers who are  well-funded (wealthy), financially constrained (middle class) and underfunded (low income).

The Underfunded Reverse Mortgage Borrower

We are starting off with the underfunded borrower because this group is most likely to get a reverse mortgage. This type of  borrower typically has little to no assets other than their home. Their income is usually just Social Security and maybe a small pension.

A reverse mortgage is often implemented in order for them to remain in the home, help improve their standard of living, help meet basic living needs, help pay for healthcare, and provide access to funds when large expenses arise. These are people who should get a reverse mortgage.

The Well-Funded Reverse Mortgage Borrower

This type of borrower is very strong financially. They have substantial financial assets for retirement spending as well as significant monthly income. These types of borrowers would rarely, if ever, consider getting a reverse mortgage because they would assume they would have no need for one. Even though these borrowers will more than likely never have a need for a reverse mortgage, they should seriously consider this option as part of their overall retirement plan and use the reverse mortgage strategically.

The well funded borrower could use the reverse mortgage to grow and retain more of their wealth through active management of their retirement portfolio which could leave a larger legacy or inheritance. It could be used to reduce tax consequences such as early gifting in order to reduce income taxes. Yes, the rich could get richer through the strategic use of the reverse mortgage.

The Financially Constrained Reverse Mortgage Borrower

This type of borrower has “just enough” or “not quite enough”  for retirement spending.  These borrowers are fairly strong financially due to strong income and they have retirement assets, but their overall success rates in their financial plans are lower.

They could also be financially devastated due to a financial shock such as health, long term care needs, and supporting adult children financially. These borrowers typically have gaps in their retirement plan that can be addressed with a reverse mortgage.

Although these borrowers may or may not need a reverse mortgage now or even in the near future, it more often than not should be implemented as a way to deal with financial risks that could prove expensive and financially devastating.

Why People Who Don’t “Need” a Reverse Mortgage
Should Consider One

Both the “Well Funded” and “Financially Constrained” borrowers are unlikely to ever consider the reverse mortgage unless the need arose. The reason is simple. They assume that a reverse mortgage is only for those in financial hardship. Let’s take a look at the reasons why they should consider a reverse mortgage.

• Gaps in a retirement plan such as not having long term care insurance could be addressed through self-insurance. Or the reverse mortgage could be used to free up funds in order to buy long term care insurance.  Long term care needs can be financially devastating and this strategy can help deal with the costs, if not pay for it all, while maintaining liquid retirement assets and reducing taxable events.

• Strategic use of the reverse mortgage in financial planning can help retain more of their retirement assets during a down market as well as over time allowing them to leave a larger legacy or inheritance for their heirs. This strategy can significantly reduce the chances of running out of money during retirement.

• There are tax, estate and business planning strategies that could help them retain more cash and leave a larger legacy/inheritance for their estates. This strategy could allow borrowers to not only retain more liquid retirement assets, but reduce taxes   by tens of thousands of dollars.

• Switching from a regular mortgage to a reverse mortgage and continuing to make payments can create a huge source of income tax free funds. This strategy accomplishes the same thing as a regular mortgage by paying the loan down. But dollar for dollar it creates a line of credit that can be accessed at any time. It also creates a lot of flexibility because the payments are voluntary. You still have to pay taxes, insurance, maintain the home and live in it as your primary home.

• There are multiple ways to set up the reverse mortgage that can put a spouse in a much stronger financial position when the other passes away ensuring that they don’t struggle financially.

• Retain more equity in the home in a down real estate market or natural disaster and potentially have access to more funds than the home is worth. The line of credit and the growth of the line of credit are not impacted by the home’s value. It is possible the  growth in the line of credit to have more available in the line of credit than the home is worth.

• Liquify an illiquid asset by turning home equity into a source of income-tax free funds.  This is the fundamental problem with housing wealth. It is not liquid. Having equity available to you at any time can bring peace of mind.  On top of that, any of the funds you borrow come with a voluntary mortgage payment option.

• Preparation for a retirement plan that fails or other devastating financial events such as divorce, medical expenses, long term care, changes to Social Security, Medicare or inflation. Think of the reverse mortgage as insurance against any of those catastrophes. You may never need it, but your glad you have it when you do.

• Using a reverse mortgage to purchase a new home could free up additional cash to invest or save. If you were to pay cash for a home, you are tying up liquid cash in an illiquid asset. If you were to finance it with a regular mortgage, you should get a reverse mortgage and make a payment.

Financial Risks During Retirement and
Why The Reverse Mortgage Makes Sense

I completely understand why people think they don’t need a reverse mortgage. If they don’t have have financial problems today and they don’t see any problems coming down the road, why would they get a reverse mortgage?

Do you buy insurance, life, auto, home? Of course you do. Why? Because one bad accident could be financially devastating.

And that is why people who don’t think they need a reverse mortgage should get one. Things could be fine today, the retirement plan looks solid and everyone is healthy. However, one financial shock could be financially devastating.

Retirement is no longer measured in years. It is measured in decades. And there is a whole lot of stuff that can go wrong. According to Social Security Life Table Charts, your have a 30% chance of living until you are 90. If you retired at 62, that is almost 30 years of retirement.

Think about all of the things that have gone wrong over the last 30 years. We have had 13 notable economic bubbles and recessions over the last 30 years. Most notably of these were Black Monday (1987), Dot Com bubble (2000), 9/11 (2001), housing bubble (2008) and the Covid Pandemic (2020).

The housing bubble of 2008 was brutal. Housing prices across dropped as much as 50% depending on the area. It took over 7 years for the market to comeback to pre-crash values. And even then certain markets, price ranges and types of real estate took even longer to recover.

But it wasn’t just real estate that took a hit. About 1 year prior to the real estate market crashing, the stock market started to crash. From its peak in October of 2007 to the bottom in March of 2009, the Dow Jones dropped 53%. It took over 6.5 years for the Dow Jones to recover back to its peak in 2007.

The most number of reverse mortgages in the history of the program were funded in 2007, 2008 and 2009. The number of people getting reverse mortgages started dropping from 2010 until 2019. There were 73% less reverse mortgages done in 2019 than the peak of 2009.

There is a very obvious correlation here. People were losing significant amounts of money in the stock market and real estate prices were plummeting. It makes sense that more people would get a reverse mortgage during these times. It also makes sense that from 2010 until the the Corona virus hit, fewer and fewer people were getting a reverse mortgage. This is because we were in the longest running bull market in history and housing prices were appreciating rapidly.

The biggest problem with this is that people were being reactive instead of being proactive. And that is the biggest problem with people in general. They react to today’s problems and their immediate impact. They were not considering how to be better prepared for problems in the future, nor how todays problems might impact their future. In other words, people are generally not prepared for the future in which history repeats itself over and over again.

It’s not just real estate and stock market volatility risks people face during retirement. There are all kinds of risks that people can face during their retirement that can have massive negative financial impacts.

Medical Expenses in Retirement

Over a 23 year period a couple aged 65 can expect to pay $280,000 in medical expenses during their retirement.
Medicare Part B = $270 a month
Medicare supplement plan = $300 a month
Dental and Vision = $135 a month

TOTAL = $705 a month or $8640 a year

Assuming the couple lives 23 years and adjusting for inflation that is $280,000.  These numbers do not take into account co-pays or the costs of alternative medicine. And for those that hit the Medicare Donut Hole every year, those costs will likely be significantly more.

Long Term Care Needs

The average 65 year old has a 70% chance of needing long term care at some point during their retirement. Women average 3.7 years of care while men average 2.2 years. About 20% of people that need care will need it for more than 5 years.
The costs for care are staggering.
Chart of estimated monthly cost of in-home care, assisted living and memory care

If we were to look at need for care for three years. It really puts things into perspective on how financially devastating long term care costs can be. These numbers do not take into account increased costs of services over a a three year period.

Chart showing the cost of 3 years of needing in home care, assisted living and memory care

The reality is that long term care is costing significantly more than the numbers above because the funds that are being withdrawn from retirement accounts will usually be taxed.

Less than 5% of the senior population is living or will live in a nursing home at any given point. And less than 2% of the population is living in assisted living currently. This means the bulk majority of seniors get their care at home, which although is the least expensive option of the three, can still be very expensive.

Longevity of Life is a Financial Risk

We are living longer and longer. There is a 30% chance that you will live until you are 90. There is a 10% chance you will live to 95.  The longer you live, the more money you need and the more likely you are to run out of money due to various financial circumstances you will face.

The other issues are that people underestimate how long they are going to live. The longer people live, the more money they will need, and financial risks during retirement increase. Longevity risk is a real problem in retirement planning. Here are some interesting statistics and research from Stanford  on longevity:

• 2 in 3 pre-retiree men underestimate the life expectancy of the average 65-year-old man. Of that group, 42 percent underestimate average life expectancy by 5 years or more. Roughly half of pre-retiree females underestimate the life expectancy of the average 65-year-old woman.

• The main source of longevity risk is the discrepancy between expected and actual life spans, which have been large and one-sided; forecasters, regardless of the techniques they use, have consistently underestimated how long people will live.

• The actual age of retirement has increased even more slowly. There is a considerable gap between retirement expectations and experience. The median “expected” retirement age is 65, the median “actual” age is 61.

Volatility in the Stock and Real Estate Markets

We covered this earlier. There have been 13 notable economic bubbles and recessions in the United States over the last 30 years. Do the stock and real estate markets come back? Yes. But what most people don’t understand is the types of returns they need to get on their investments just to get back to their starting point prior to the crash.

Let’s use the stock market crash from 2007 as an example. Assuming your investment portfolio followed the Dow Jones Industrial Average, your portfolio would have lost 53% of its value. Based on the chart below, you would need over a 100% return and the likelihood of fully recovering from the loss is only 80.6%.
chart showing the returns needed to become whole after a loss and likelyhood of being made whole.  Source: Craig Israelsen, Ph.D

What this chart does not consider is that you may have to take your required minimum distributions during this time. Nor does it consider that you may be drawing funds from the portfolio both as it is declining and increasing.

Draws from the retirement portfolio would increase the rate of return you would need as well as the length of time to recover. Plus, if you are drawing from these sources in a down market, you are typically locking in losses.

Loss of Spouse is a Financial Risk

For most of us, the thought of losing a spouse is unbearable. So, instead of addressing this issue we cling to the romantic idea of passing away peacefully together. Unfortunately, it more than likely will not happen that way.

Women outlive men by 5 years on average. There is a 45% likelihood that a woman will outlive a man by 5 years, a 31% chance of 10 years and a 20% chance of 15+ years.

The loss of a spouse brings with it what could be a big financial problem, the loss of household income. This could be in the form of a reduction of Social Security income, loss of pension income, loss of wages, as well as other sources of income.

As of June of 2022, the average monthly Social Security income check is only $1,542 which equates to just $18,504 a year. Assuming both spouses are receiving the same amount from Social Security, the passing of one spouse reduces household income by $18,504 a year.

Granted household costs would go down some. However, the remaining spouse could have a difficult time dealing with a mortgage, consumer debt and other household expenses. This could cause the remaining spouse to draw from retirement accounts more heavily and exhaust those funds prematurely.

Debt in Retirement Should Be a Big Concern

Debt should be a major concern for anyone in retirement. Debt affects cash flow, strains retirement accounts, creates stress and anxiety and often requires making tradeoffs. In other words, consumer debt can keep people from living their best retirement lives. Not only does debt affect life in general during retirement, if a spouse passes it can put the remaining spouse in a financial strain at best or unsustainable at worst.

• In 2013, 61.3% of households headed by an adult aged 60+ had some form of debt. Among senior households with debt, the median total debt was $40,900.

• 44% of those aged 60 to 70 have a mortgage with a median amount owed of $68,500.

• 34% of older households carry credit card debt with the median amount owed of $2,300.

Changes to Social Security

Changes to Social Security are one of the top three concerns people have during retirement. There is good reason to be concerned.

Prior to the Covid-19 pandemic Social Security was predicted to run out of money in 2035. When Social Security runs out of money it is possible that recipients will see a 31% cut to benefits. Can you handle a 31% cut to your Social Security income?

As of 2023, the new forecast of Social Security running out money is now 2034.

Could it get any worse? Unfortunately, yes! There very well could be a significant portion of seniors that won’t be able to get a reverse mortgage after the cuts to Social Security because they won’t have enough income to qualify. And these would be the very people that desperately need the reverse mortgage to replace the income they lost.

In no way is this an exhaustive list of financial risks during retirement. However, medical expenses, long term care, longevity, market volatility, loss of spouse, support of family members and consumer debt are the most common things retirees will face.

All these things can cause financial plans to fail, cause people to run out of money, reduce household income, create financial and emotional stress, reduce quality of life, and significantly reduce inheritance for heirs.

The good news is that a reverse mortgage can be used strategically to reduce the impact of those retirement issues during your retirement. Those risks are why it makes sense to implement a reverse mortgage now instead of waiting until you need it.

The point of all of this is that the answer to “Who should get a reverse mortgage?” is that just about everyone should get a reverse mortgage and have it as part of their overall retirement plan. Using the reverse mortgage strategically can provide better financial outcomes, reduce financial risks and be back up versus using it as a last resort.