Increasingly advisors see the writing on the wall. With the stock market at a historic high and the equities market poised for a crash, retirees are likely to face a cash crunch. Even those without investments to draw upon are finding themselves short of cash thanks to historic inflation of food, gas, and consumer good prices. In such situations finding a way to bolster monthly cash flow is essential.
In an ideal world, a retiree’s stock portfolio would generate consistent returns and income, consumer inflation would be nominal, and expenses consistent and predictable. Unfortunately, today such a world doesn’t exist.
Financial columns and television pundits routinely focus on investments, risk management, and withdrawal rates giving little consideration to cash flow. But the tide is turning. As Chris Farrell points out in his recent Forbes column, the typical 54-64-year-old with a 401(k) or IRA has a median value of $135,000. More concerning, more than a quarter of American workers have no retirement savings account. The truth is investors with modest or sizable savings typically focus on the rate of return often overlooking the importance of eventually generating reliable cash flow from said investments.
All of which leaves many investors and those with no retirement savings few pleasant choices. Cut expenses or liquidate their existing assets. Typically neither is an attractive proposition. Investors fear losing out on future market gains or the timing of their withdrawals. Those with no savings to fall back on begin to consider just how much further they can cut back on their current expenses; sometimes there’s nothing left to cut.
Then there are those who have substantial equity in their home who believe they have no choice but to reduce their standard of living in what should have been their golden years. As a result, they live out a meager existence or begrudgingly become dependent upon the support of family members. This is a tragedy in the truest sense of the word; and one that could have been avoided.
As long as there are investors being encouraged to ride a plummeting stock market to the bitter end in hope of gaining some value with dollar-cost averaging; and as long as there are those who have little or no retirement savings to generate cashflow there is a clear and present duty for the home’s value to be considered as a tappable asset. After all, future rates of return may not put food on the table but cash flow certainly can.
All things considered, the willful oversight of reverse mortgages is no longer tenable or defensible. After all, cash flow is king. Cashflow is where retirement planning and projections meet reality head-on. Will reality find many wanting?
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2 Comments
With Carter-style inflation coming back, cash flow and managing sequence of returns risks are even more important. Fortunately, we have a tool that can help retirees.
Where is the increase in new borrowers demonstrating your claims? Sounds great, even sophisticated but is more puff than substance.
Use of reverse mortgages to mitigate the risk of loss due to the sequence of portfolio returns is marketing propaganda with no proof. It can be questionably demonstrated but has no significant empirical evidence. It is the dream of the elite, not the practice of those with significant portfolios even when looking at the population of just those over 62. It is problematic when the portfolio is inside a tax qualified retirement plan (defined benefit or defined contribution) when combined with RMDs.
The coordinated strategy is more mental manipulation than overwhelming rational solution.
Undisciplined cash flow solutions are too many times only forestalling a disaster that proves worse than if no action was taken at all.
Those who compare current inflation to that of the Carter years are closer to damaging alarmists than those who provide practical solutions.
The use of reverse mortgages to mitigate the risk of loss from the sequence of portfolio returns and the alleged coordinated strategy solution were introduced to the industry through a “white paper” at the 2006 NRMLA National Convention on the embarcadero in San Francisco, CA. This solution has had less use than H4P endorsements. In fact H4Ps have an amazing demand when compared to this greatly unaccepted and unadopted method of mitigating risk and any demand for H4P is more talk than measurable fact.
With less than half the new borrowers during HUD’s fiscal year ended 9/30/2021 than were seen during HUD’s fiscal year ended 9/30/2017, our industry looks more dying than vital or vibrant.