Reverse mortgage professionals have long lamented that a retiree’s housing wealth is rarely considered a means to help fund retirement cash flow needs. Odd considering that the typical retiree has two-thirds of their wealth tied up in their home.

So why do so many advisors ignore what is most often their client’s largest asset? Is it bias, ignorance, or something else? 

A Broken Retirement Planning Model?

Such a vexing question warrants examination. Mutual of Omaha reverse mortgage adviser Mitch Cooper provides one explanation in his recent column in The Street.

Retirement is no small matter. “Retirement is the largest purchase a household will make”, says David Blanchet, the head of retirement research at PGIM. So what model shapes an advisor’s retirement and investment recommendations? Modern Retirement Theory, says Cooper.

Modern Retirement Theory (MRT) prioritizes how retirement funds are allocated much like a pyramid tier system, not unlike Maslow’s Hierarchy of Needs. “The order goes as follows: bottom tier, Essential Needs, second tier, Contingency Fund, third tier, Discretionary Fund, top tier, Legacy”, explains Cooper. The model prioritizes retirement funds to meet the retiree’s needs for meeting their basic living expenses before any discretionary expenditures such as vacations or even home improvements.

A Top-Heavy Model

However, the Modern Retirement Theory pyramid is about to tip over argues Cooper because the largest asset has been placed on top as a legacy asset. Such a model is unable to meet most retirees’ needs and ignores their wishes. Cooper reveals an Insured Retirement Institute study in 2022 found only 4% of retirees surveyed said their number one goal is to leave a legacy to their heirs. Moreover, 41% of retirees (the largest cohort) said their number one goal was to ensure a comfortable standard of living.

Perhaps Mr. Cooper has cracked the code of why advisors rarely address home equity as part of retirement income planning or simply ignore it. What would a financial advisor do if they found their client had two-thirds of their wealth invested in a Real Estate Investment Trust or REIT? “You would expect a strong recommendation to diversify. However, it is even worse than a REIT, because housing wealth is one home, in one neighborhood, in one market”, writes Cooper. 

To be fair, there are some legitimate reasons housing wealth is typically excluded from retirement income planning such as the illiquid nature of the asset, the high costs of selling, and strong emotional bonds to one’s home. “Often the result is for the home to be designated a reserve or legacy asset. But is this the best option?”, writes Cooper. 

All of this leaves downsizing, further leveraging the home with a cash-out refinance and a higher mortgage payment, or a reverse mortgage as viable options. While a reverse mortgage is certainly not a panacea to retirement income planning or rebalancing asset allocations it is one of the most cash-flow-advantaged ways for retirees to ensure a comfortable standard of living.