A Tale of Two Advisors One Who Knew about Housing Wealth and How to Use it and the Other Who Did Not

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1 How Reverse Mortgages Have Changed Retirement Income Planning for Baby Boomers Don Graves, RICP Adjunct Professor; The American College for Financial Services President; The HECM Institute for Housing Wealth Studies Member: The Funding Longevity Task Force Business Development Consultant; Retirement Funding Solutions 16 Years as a Home Equity Retirement Specialist with 2,300 Clients In the next 60 Minutes The Changing Landscape - Opportunity What is a HECM The HECM Line of Credit and FINRA Four Uses of Housing Wealth 4 Killer Questions Distinctives/Goals Retirement Income/Advisor Focused Faster Pace/Lunch and Learn Snorkel vs Scuba Questions to AskDonGraves@Gmail.com A Tale of Two Advisors One Who Knew about Housing Wealth and How to Use it and the Other Who Did Not

2 Meet Pierce and Linda Rosen Ages: Top 5 Reverse Mortgage Myths Advisors Tell their Clients Professions: Retired Computer Consultant / Retired Nurse Current Retirement Savings: $1,000,000 - IRA Housing Wealth: $400,000 Existing Mortgage / Payment / Remaining: Current Withdrawal $40,000 Not For You Complicated Last Resort Expensive Equity Stripper Advisors have a fiduciary responsibility to their clients. In no uncertain terms, this means that they must do what is in the best interest of their clients. If an advisor fails to become informed about the benefits of HECMs, they are failing at their fiduciary duty. By no means is a HECM right for every client, but every advisor worth their salt should have a cursory knowledge of the subject matter in order to, at a minimum, factor it out of their client s equation. The Changing Landscape The Choluteca Bridge in Honduras Boomer Facts We May not Know 65 million existing baby boomers 87% of Boomers Own a Home 56 Million will own a home in retirement 68% expect to carry a mortgage into retirement Existing Retirees account for about $3 Trillion Dollars in Home Equity C.W. Copeland, Ph.D.Assistant Professor ofinsurance Huebner School the American College

3 DSG Enterprises Ltd 2013 For Training Purposes Only -Not For Distribution Why Advisors are Paying Attention Typical Retirement Planning Picture New and Wide ranging Acceptance of the HECM Tool Every Client has seen the Commercials Clients have Already asked about it Rise of Fierce Competition Fiduciary Fallout Rise of the Baby Boomers The Sizeof the Opportunity The Shift to Retirement Income Planning Income Investments Insurances SWip Bucket Floor

4 The Changing Conversation How Do Reverse Mortgages and Retirement Savings Work Together to Enhance Retirement Outcomes and Client Satisfaction? Typical Retirement Planning Picture Income Investments Insurances SWip Bucket Floor What is a Home Equity Conversion Mortgage? It s Just a Mortgage!

5 It s Just a Mortgage. with Four Major Differences 1. Age Restriction 2. Repayment Flexibility 3. Non Recourse 4. Rising Lineof Credit What is the HECM Home Equity Conversion Mortgage (HECM) A Federally Insured Loan developed by congress in 1988 to provide a mechanism for retirees 62 and over to use their housing wealth in a conservative and prudent manner. Without having to make any Monthly Loan Payments And Without giving up home Ownership or Coming off Title to house Without Having to Repay More than Home Is Worth 10yrs 20yrs 30yrs How Much Can You Receive The Amount of money you can receive from a Reverse Mortgage is based on 3 things: The Ageof the youngest borrower The Value of the property The Interest rate associated with the program *A Reverse Mortgage must be a first mortgage, so any other loans, liens, judgments etc must be paid off from the proceeds of the program first.

6 How Can Proceeds be Received? 1 Line of Credit $ 1. Line of Credit 2. Lump Sum Lump Tenure Term Combination $ $ $ $ 3. Monthly Tenurepayments (length of loan) 4. Monthly TermPayments (limited and adjustable) 5. Combination When Does The Loan Get Repaid? The loan is repaid when the last surviving borrower permanently departs the home. (either moves or deceases) At that time, whatever proceeds were advanced to the borrower plus accrued interest and HUD fees will be repaid 100% of the remaining equity is passed on to the borrower, the heirs or the estate. 3 Ways Reverse Mortgages Can Be Implemented in a Retirement Distribution Strategy Why FINRA Changed their Positon In 2013! As a LAST RESORT As a FIRST Option As a COORDINATED STRATEGY A Short Summary of the Journal of Financial Planning Article: Reversing the Conventional Wisdom: Using Home Equity to Supplement Retirement Income

7 Growth of Line of Credit Borrowing Power Reverse Mortgage Line of Credit: RMLOC LOC Borrowing Limit $2,400,000 $2,000,000 $1,600,000 $1,200,000 $800,000 $400,000 Home at age 62 3% Home Appreciation Home Initial LOC HELOC 4% Low 6% Mid 8% High Initial cost LOC Borrowing Limit RMLOC is Simple: Access to Cash - Return like moderately invested portfolio - Steady, reliable growth - Won t go down - Tax-free withdrawals $400,000 $ AGE AGE Get Early or Get Late? Get Early or Get Late? Spend from portfolio If it runs out, turn to Reverse Mortgage Line of Credit Get RMLOC either Now, at start of retirement, or Later, if portfolio runs out ( Last resort ) Which works best? Get RMLOC later or now? What s your vote? LOC Amount Available $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $250,000 home $500,000 portfolio Interest rate controlling initial LOC size islowearly and is higher later Line of Credit early Line of Credit late Last Resort Texas Tech: Pfeiffer, Schaal, Salter Journal of Financial Planning $ AGE Pfeiffer, Schaal, Salter Journal of Financial Planning

8 Standby Reverse Mortgage Lifetime spending: No Reverse Mortgage S&P Get RMLOC early, hold in Standby When portfolio down significantly: Don t sell investments Live on Line of Credit Repay Line of Credit after market recovery stayed intact 80% of lifetimes! Texas Tech: Pfeiffer, Salter and Evensky Journal of Financial Planning No reverse mortgage? Money available only 40% of lifetimes Pfau 2015: 4% post-tax initial WD rate. $1M 50/50 portfolio, $500K home, 25% marginal tax rate 6 Ways to Boost Lifetime spending 6 Ways to Boost Spending 5 Good Ways: Get Reverse Mortgage Early Get Home Equity Early, Use Last Coordination with portfolio: Sacks and Sacks Coordination with portfolio: Texas Tech (Salter, Evensky and Pfeiffer) Monthly Tenure Payment Get & Spend Home Equity First Get Home Equity at the end as Last Resort Get Early Use Late Tenure Last Resort No Rev Mtg Pfau 2015: 4% post-tax initial WD rate. $1M 50/50 portfolio, $500K home, 25% marginal tax rate

9 Large Withdrawal Boosts Get early Use late, as contingency fund if portfolio runs out Monthly tenure income: easy to live with, easy to implement Coordinate with portfolio: don t sell in market downturns Best method for this client? You and client choose Financial Thought Leaders Speak About the HECM Line of Credit MITIGATING RISK IN RETIREMENT Can Reverse Mortgages Help Manage Retirement Income Risks? Mitigating Sequence of Returns Risk Factors

10 The Problem Negative Returns in the early stages of retirement places a huge drain on the plans longevity Main Retirement Risk Question 38 Can the client sustain their current lifestyle with a $150,000 a year withdrawal in the current interest rate environment? Portfolio Depletion Possible Solution #1 Take no withdrawals from the Plan in the Years following a Negative return. Allowing the portfolio to retain substantial reserves. Possible Solution #2 In order to implement this strategy, Dr. Alexander will need an alternate source of income that is not significantly impacted by short-term market volatility Whole Life Insurance: Annual Systematic Withdrawal, $100,000 (Annual Income Net Taxes 33%) Problem Solved!

11 The Client had Not Purchased $1million Life Insurance Policy At All What if they not Purchased Enough Life Insurance What if they Did NOT Want to Use the Life Insurance MANAGING DEBT IN RETIREMENT And She did not want to Change Her Lifestyle! Retirement Without a Monthly a Monthly Mortgage Payment Payment Client Summary Age of Youngest Borrower: (66) Value of Portfolio: $300,000 Current Monthly Draw: $2,000 Existing Mortgage Payments: $800 Client Summary Age of Youngest Borrower: (66) Value of Portfolio: $300,000 Current Monthly Draw: $1,200 Existing Mortgage Payments: $0 MAXIMIZING WEALTH IN RETIREMENT

12 Retires Age 66 First Year Income Need $ 72, K $ 750,000 Cash $ 325,000 Initial Social Security $ 25,571 Housing Wealth $ 500,000 Add Home Equity Draws $14,400 a year Outcome without Home Equity Draws Monthly Draw: Add $1200 a month from Housing Wealth Outcome with $1200 a month in Home Equity Draws Bridging Strategies

13 Desired Retirement Spending Portfolio Withdrawals plus Social Security Fall Short $300,000 $300,000 Annual Lifestyle Cost $250,000 $200,000 $150,000 Annual Lifestyle Cost $250,000 $200,000 $150,000 Desired Spending $100,000 $100,000 $50,000 $50,000 4% Portfolio withdrawals and Social Security $ Homeowner's Age $ Homeowner's Age $300,000 HECM Draws Augment Portfolio Income Reverse Mortgage Draws Augment Portfolio Withdrawals $250,000 What if? $300,000 Annual Lifestyle Cost $200,000 $150,000 Annual Lifestyle Cost $250,000 $200,000 $150,000 $100,000 $100,000 $50,000 $50,000 4% Portfolio withdrawals and Social Security $ Homeowner's Age $ Homeowner's Age

14 Paid off $40,000 Mortgage and Took a $1,500 Monthly Income for 8 Years RightSize and Re-Purpose $535,000 1 Sell the Home and Have $400,000 HECM for Purchase Liberated Proceeds: 5 $252,000 2 Price of the NEW Home: $300,000 HECM for Purchase Makes: $152,000 4 Client must ADD:$148,000 3 Choices for Liberated Proceeds All Proceeds Taken in Cash All Proceeds Kept in Line of Credit Hybrid: Part in Cash/Part In GROWING Line of Credit 3

15 1. Would You Be Comfortable If We Had A Back Up Plan For Your Retirement Savings? Wednesday ELITE Advisor Webinars Simple Questions Here are four very basic questions that open up the Retirement Income Conversation with both Parents and Children 2. Would It Be Ok, If You Never Had To Make Another Monthly Mortgage Payment? 3. If You Could Add An Extra $100,000 To Your Retirement Savings AndHave A Much Better Living Situation Would You Be Open To Learning How? 4. Do Your Parents Currently Own Their Home? The Advisors Guide to Reverse Mortgages in Retirement Planning: 10 Things Your Clients Need You to Know Why Did FINRA Change Course on Reverse Mortgages? The One Discovery that s Shocking the Financial Advisor Community Discover the #1 Way Advisors are Helping their Retired Clients Generate New and Substantial Retirement Reserves Plus four Other Legal, Complaint and Ethical Ways Advisors Are Making More Money (and without using the proceeds of the Reverse Mortgage to do it!) How Reverse Mortgages Have Dramatically Changed Retirement Income Planning for Baby Boomers: 4 Ways Housing Wealth is Changing the Retirement Income Conversation! The Four Biggest Risks to Retirement Income: And How the Reverse Mortgage Can Neutralize them all! Fiduciary Fallout: The 7 Things Advisors Need to Know about Housing Wealth in order to Protect Their Practices Understanding the Home Equity Conversion Mortgage An In depth Overview of the Home Equity Conversion Mortgage Housing Wealth Foundations 20 minute segments for advisors wanting to see case studies and examples 12 Questions Broker-Dealers Ask About Reverse Mortgages Discover the 12 Most important questions broker dealers are asking about the new reverse mortgage HECM Certification Course (Housing Wealth Certified Advisor) Helping ELITE Advisors grow their influence, revenue and client outcomes by understanding the emerging role that housing wealth plays in today's retirement income planning Don Graves,RICP President -Chief Conversation Starter HECM Advisors Group The HECM Institute 25 Washington Lane, 10A Wyncote PA, Direct (215) Mobile: (484) Toll-free/E-fax (800) Don@HECMAdvisorsGroup.com Adjunct Professor, RICP Program -The American College of Financial Services Providing Education regarding the Emerging Role of Reverse Mortgages in Retirement Income Planning