The rapidity is which the economy toppled due to the pandemic was startling, to say the least. Coming off a record 11-year bull market, many retirees may have been lulled into thinking that their retirement accounts would continue to increase indefinitely. Suddenly faced with a portfolio drastically reduced in value, retirees scrambled to find a substitute for selling invested funds at a loss.
Even Congress, not generally renowned for financial prescience, recognizes that mandatory required minimum distributions (RMDs) may subject the retiree to loss. In the CARES Act, Congress actually suspended compulsory RMD distributions for 2020. In doing so, the goal is to help the retiree wait out the market turbulence in order to allow savings to recover.
Although the CARES Act will be helpful to many, retirees still need cash flow; the bills keep coming. Being forced to sell at a loss especially early in retirement or for sustained downturns, is known as sequence of returns risk. Advisors are charged with helping their clients avoid this risk.
For a rare subset of retirees whose financial advisors prepared them for the inevitable market disruption, this cash flow may be provided by a reverse mortgage line of credit, an FHA-insured product known as a HECM Line of Credit (LOC). The benefit of putting this LOC in place is significant as evidenced by this spontaneous letter received from a Mutual of Omaha Mortgage customer:
“You may not remember me but we did a HECM LOC about 7 years ago. In these unprecedented times of health and financial uncertainty my LOC, now grown to $540,000, provides me with the comfort that I might not otherwise experience.”
– FB, Orange County CA
It is hard to imagine any client not being comforted by having immediate access to tens of thousands of dollars just when he is suffering market shocks. In fact since 2012, the researchers, academicians, and practitioners at the Academy of Home Equity in Financial Planning at the University of Illinois have broadcast the power of preparing for market downturns by establishing a HECM Line of Credit as a substitute for taking dangerous portfolio draws in times just like these.
The benefits of establishing a HECM LOC are extensive. Advisors to retirees would want to understand these primary HECM LOC attributes:
- A Defense Against Buying High and Selling Low
- A Line of Credit that the Bank Cannot Cancel, Freeze, or Reduce
- Cash Flow Without Mandatory Monthly Principal and Interest Payments
- Access to Home Wealth that Does Not Erode in a Housing Downturn/Inflation
- A Revolving Line of Credit with No Prepayment Penalties, and is Non-Recourse
- A Growing Line of Credit Not Correlated to Home Values and/or the Market
Note that under a standard HECM LOC “Borrowers must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees.”
To learn more about the FHA-insured HECM Line of Credit, please contact Shelley Giordano, Enterprise Integration, Mutual of Omaha Mortgage firstname.lastname@example.org