Tag: tax planning

Reverse Mortgage and the ‘Standby’ Strategy

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In a recent Bloomberg article, the author laid out the case for using reverse mortgage as a responsible option for long-term financial planning.  Assistant professor of financial planning at Texas Tech University, John Salter, and two of his colleagues put the scenario to the test.


Here is what they found:


Salter and two colleagues set out to determine if there was a place for reverse mortgages in responsible long-term financial plans. They started by looking at the prospect for a 62-year-old relying on a $500,000 investment portfolio to fund retirement. To reach a 90 percent probability that the money will last 30 years, the retiree could take out just under 3.25 percent of the portfolio’s value annually. (The portfolio is 60 percent stocks, 40 percent bonds.)

The outlook brightened after the planners used what they dub a ‘standby reverse mortgage’ strategy, based on a home valued at $250,000. In a falling market, the reverse was tapped, rather than the portfolio. The retiree repays the money when the market recovers. That supports a 5 percent withdrawal rate, with a 90 percent probability of the money lasting 30 years, Salter says.

Reverses can also be used to create monthly income. Gerald Wagner, CEO of Ibis Software, which does reverse mortgage analysis, crunched some scenarios to test that out. He started with a base assumption of $450,000 in home equity and an $800,000 investment portfolio with a 60/40 allocation. In general, adding the reverse to the mix supported a sustainable withdrawal rate between 5 percent and 6 percent.

Also in reverse mortgages’ favor is tax treatment. The money pulled out is tax-free income and doesn’t count when computing taxes on Social Security income. And a reverse line of credit can help delay taking Social Security until age 70, when retirees get the largest payout.



In order to qualify for a reverse mortgage, the individual must own their home, be at least 62 years old, and have some equity in the home. There are no income, credit, or medical requirements. In general, the older the borrower (or the youngest borrower in the case of couples) and the more valuable the home, the more money available. Other factors also come into play, such as: the appraised home value, interest rates, and the amount of equity in the home.


Jan Jordan is a Reverse Mortgage Specialist serving the Fort Collins, Loveland, Longmont, Greeley, and Front Range areas of Colorado as well as Cheyenne and Laramie, Wyoming. Click here to contact Jan and learn if reverse mortgage is right for you.