The role of reverse mortgages

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Authors of a report that was published March 2014 in Journal of Financial Planning argue that reverse mortgages, which are loans that provide borrowers with cash payments that are based on the equity of a borrower’s home, should play an important role in retirees’ financial planning.

Historically, reverse mortgages were viewed negatively and considered only as a last resort, say authors David W. Johnson and Zamira S. Simkins, who are professors at University of Wisconsin-Superior. However, that’s changing, because traditional retirement-income methods (pensions, personal savings, Social Security) have been “considerably weakened,” the authors say. Consequently, current and future retirees should consider including a reverse mortgage as part of their retirement plan.

If you decide that a reverse mortgage makes sense, you should coordinate how you use the reverse-mortgage funds with your portfolio’s stock and bond fund, says Jay Marsden, who is an elder law attorney. For example, he suggests that you first cash in portfolio assets for expenses that are related to lifestyle choices, such as travel or dining out, because those expenditures likely will diminish as you age. He says that leaves funds from a reverse mortgage on arguably your biggest asset—your home—free to supply income as your health-care needs and costs increase with age.