The home equity conversion mortgage (HECM) is the Federal Housing Administration’s (FHA) reverse mortgage product and program. Life annuities were somewhat favored in this comparison, particularly for individuals, and should be used by retired households with significant financial and retirement asset holdings instead of reverse mortgages if there is a desire or need to increase retirement incomes. Finally, the current terms are compared that is, incomes that would result from tenure-payment reverse mortgages on housing with incomes from immediate life annuities from retirement assets. Then, one recent comprehensive analytical study of how reverse mortgages might best be used during retirement is reviewed. Because the literature on the various types, uses, and terms of life annuities already exists, that is not reviewed here, but the interested reader can see, for example, Pang and Warshawsky (2009), Warshawsky (20) and Blanchett (2014). First, an explanation and review of how reverse mortgages work is offered. The main subject of this paper is a realistic comparison of reverse mortgages and life annuities. Yet an alternative strategy exists-tenure payments from a reverse mortgage, also known as the HECM (home equity conversion mortgage), based on the value of an owner-occupied house. Results show that for three timeframes with different interest rate levels, the life annuity produced higher income for individuals of almost all ages and both genders in retirement, while for couples, the reverse mortgage produced generally higher incomes, although the income from the annuity improves relatively when the age spread among the couple widens and as they are older.Īn increasingly dominant thought in the professional financial planning literature is that there should be a prominent role for immediate life annuities purchased with retirement assets in retirement income strategies.The answer lies, in part, in an empirical analysis done here with note of costs and current market conditions, using standard calculators. For those retired households who have both significant retirement assets and housing equity, the question remains whether they should use reverse mortgages based on their housing equity or immediate life annuities based on their retirement assets.A recent article in the financial planning literature found that tenure payments from a reverse mortgage effectively and efficiently balance income and bequest needs of a retired household.This paper reviews how reverse mortgages work, with a focus on costs, taxation, and possible use in enhancing lifetime retirement security through tenure payments.Warshawsky and Tatevik Zohrabyan, supported by the MIT Golub Center for Finance and Policy.Īcknowledgements: The author thanks Michael Leahy for his research assistance. This work is based, in part, on a section of an unpublished monograph on reverse mortgages by Mark J. He previously served as assistant secretary for economic policy at the Treasury Department and as a member of the Social Security Advisory Board. He is the author of more than 150 scholarly articles and four books, many in the areas of retirement, investments, and insurance. Warshawsky, Ph.D., is a visiting senior fellow at the MIT Golub Center for Finance and Policy, president of ReLIAS (Retirement Lifetime Income and Asset Strategies) LLC, and a senior research fellow at the Mercatus Center at George Mason University. Journal of Financial Planning: February 2017
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