In ILLUSTRATION 1, we have a 30-year retirement planning strategy known as HECM as a Last Resort.* This means are exhausted before relying on the Home Equity Conversion Mortgage for income. Starting with an initial value of $400,000 the withdrawal rate is 6.5%, an inflation factor of 3.5%, and actual market performance based on a portfolio mix of 60% stocks and 40% bonds. This Scenario assumes a retired couple with $27,000 in social security income trying to maintain a lifestyle that cost $53,000 the first year of retirement.
- Portfolio exhausted at year 24.2, nearly 6 years short of life expectancy
- Portfolio balance = $0.00
- Total draws on HECM Line of Credit = $523,020(Includes the accumulated interest)
*Sacks and Sacks 2012—Journal of Financial Planning
In ILLUSTRATION 2, known as the HECM Portfolio Longevity Strategy or Coordinated Strategy,* we have the exact same plan except, instead of waiting for the portfolio to run out before engaging the HECM,we alternate annual withdrawals between the portfolio and the HECM based on portfolio performance. Following any down year, this strategy switches to the HECM as the income source for one year.
- Portfolio success — Portfolio and income outlast lifeexpectancy
- Portfolio value = $1,021,282.65
- Total draws on HECM Line of Credit = $563,526(Includes the accumulated interest)
Retirement funds may come from investments, insurance and fixed income. But now, the HECM may help complete the longevity planning puzzle.
HECMs are becoming increasingly recognized by homeowners and financial advisors as a smart and safe way to access an important retirement asset: home equity. The HECM (Home Equity Conversion Mortgage) is insured by the Federal Housing Administration (FHA) to protect lenders and borrowers alike.
About The Author: Dan Williams
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