Speaking the language of a saver and a spender

The saver

Joe lives in an older neighborhood of nice but modest homes with well-manicured yards. He bought his home in 1997 in the suburbs of Atlanta for a mere $175,000 which is now valued at over $750,000. He took a sizable cash-out refinance in 2005. He has 18 more years of mortgage payments until his home is mortgage-free.

Having been a lifelong saver Joe still drives his 2012 Ford F150 pickup. It’s not the greatest for gas mileage but it’s well-maintained and he’s not making a car payment either. Living within his means is his mantra and he’s saved diligently since the early 90s, yet he’s not comfortable with the amount he’s saved for retirement.

After consulting with his financial advisor Joe decided to get a reverse mortgage. Instead of spending the money he usually would make on his mortgage Joe decided to double down- he applied his former mortgage payment as a new contribution to his retirement accounts. When he maxed out his qualified plans he opened up new non-qualified investment accounts as well. Today he’s socking away nearly $16,000 each year towards his planned retirement in 2028. In five years he will have boosted his retirement portfolio’s baseline balance by $80,000.

The spendthrift

Brent has lived next door to Joe for 22 years. In fact, they’ve barbecued at each other’s homes during social functions and served in the neighborhood watch group. Where his neighbor Joe is a saver Brent prefers to live the ‘good life’. Like Joe, he got a reverse mortgage last year. Feeling the relief of having no required monthly mortgage payments Brent decided to give himself the gift he always wanted- a brand-new pickup truck. Two months after not making mortgage payments Brent pulled $10,000 from his reverse mortgage line of credit for a down payment and purchased a fully-loaded 2022 Chevy Silverado with all the trimmings. His monthly payments are nearly $800 a month. His retirement savings could be better but he figured what can a 65-year-old guy do who’s going to retire in 3 years anyways? Buy a truck was his answer.

Obviously, Joe will be much better prepared to live a decent or even comfortable retirement than his spendthrift neighbor. However, what’s generally missed by most reverse mortgage borrowers is the potential to turn the loan into a ‘force-multiplier’- in this instance a way to supercharge his retirement savings should he receive modest market returns. Certainly, the cost of both loans cannot and should not be ignored but the manner in which the loan proceeds or increased cash flow is used will have a profound impact on both neighbors’ financial outcomes.

The takeaway

When it comes to homeowners getting a reverse mortgage we’ve found this. Spenders will continue to spend, and savers will look for creative ways to build an even bigger nest egg. The key is knowing your potential borrower. Are they a saver or a spender? You should know which before you dive headlong into just how a reverse mortgage could benefit them and instead focus on meeting their objectives and lifestyle goals.