By Joel Swerdlow
Financial Planners must learn about reverse mortgages; reverse mortgage originators must learn about financial planning; and everyone must be willing to change and grow.
That message comes through clearly while talking with Professor Jamie Hopkins. Normally, if you’re having a conversation with him it means you’re attending a professional conference, or you’re enrolled
at The American College of Financial Services in Bryn Mawr, Pennsylvania, at which Hopkins is a full-time faculty member. It is, Hopkins explains, “the premier educational provider and thought leader for the financial services profession”—a non-profit, accredited, and degree-granting college.
Few of us say this about many professors, but when Hopkins speaks, it is worthwhile to listen to every word. He begins with a powerful concept, “retirement income literacy.”
“With the death of defined benefit plans,” he explains, “retirees have to make their own retirement income plans or hire an advisor to help them.
In the Retirement Income Center at The American College we’ve done research to gauge America’s retirement income literacy. Only 20% of people nearing retirement could pass a quiz that measured basic knowledge. This is troubling because retirement income planning is very difficult and retirees will be unable to avoid making decisions about taxes, home equity, investments, withdrawal rates, Medicare, and long-term care.”
Enter the Baby Boomers. This huge cohort born between 1946 and 1965 has, Hopkins says, “a big issue”—they are retiring before they have enough money to safely make it through retirement. They may not realize it yet, but they will have to decrease their spending once they retire.
Cut back “significantly,” Hopkins emphasizes. Or, if you are not willing or able to do that, he says, Baby Boomers must “be more strategic about their retirement income planning,” and to be more strategic they must make “better decisions regarding home equity.” And fundamental to this, he says, is “understanding reverse mortgages.”
The American College is in the middle of doing a research project on retirement income planning and home equity literacy. “We hope to drive attention to this important issue and at the same time educate consumers on the best practices of using home equity and reverse mortgages as part of a retirement income plan,” Hopkins says.
“Reverse mortgages need to be considered as part of a retirement income plan. Home equity is the largest personal asset of the Baby Boomer generation and is often ignored in retirement income planning.” Hopkins and The American College are setting themselves up as the premier thought leader with reverse mortgages and retirement income planning through a strategic mix of original research, expertise, and educational programs.
What unique or special roles can reverse mortgages play? “Reverse mortgages are now called the saving grace for many Baby Boomer retirees,” he responds. “Outside of Social Security benefits, home equity is the largest asset for the average retiree. The big misconception many people have about reverse mortgages relates to when it is best to use them in retirement. Most people think it’s a product for use at the end of retirement, when the retiree is out of other assets. However, research has shown that in most cases it is far better to use reverse mortgages early in retirement to reduce market risks and help improve cash flow.”
Hopkins emphasizes that he is not a specialist in details of setting up/or originating a reverse mortgage, and says that people must talk to a reverse mortgage lender. But he thinks—again returning to the notion of financial literacy—that everyone must be well informed about all that a reverse mortgage can offer. “Another great benefit of a reverse mortgage,” he says, “is that it can in part diversify your equity wealth. By adding a Home Equity Conversion Mortgage (HECM) line of credit to your home you now have a liquid portion of your home that grows based on factors other than the housing market. This can help diversify your otherwise totally undiversified and illiquid home.”
Like all good teachers, Hopkins repeats his basic message in several different ways until, listening to him, you realize you have discovered it within yourself: “Both the financial services profession and reverse mortgage professionals need to start looking at retirement income planning in a comprehensive manner. This means both industries have to take steps to better understand what each other are doing and how it benefits the client and impacts the client’s overall retirement security. It is a disservice to the client to recommend a reverse mortgage without understanding how it benefits their retirement income plan.
Additionally, it is an equal disservice to not recommend that the client look at a reverse mortgage when it could be beneficial to their retirement. “Lenders need to understand sequence of returns risk,the safe withdrawal rate, portfolio sustainability, Roth conversions, and non-market correlated income sources.
Reverse mortgages can improve the sustainability of a portfolio by reducing sequence of returns risk early in retirement by acting as a non-market correlated income source which in turn can reduce the withdrawal rate early in retirement. Because reverse mortgages are loans and not taxable income, it also allows for tax planning opportunities, like Roth conversions.”
Hopkins is the co-director of The American College New York Life Center for Retirement Income, and oversees the College’s trademarked Retirement Income Certified Professional® (RICP®) program a “designation” means the student—usually a college graduate who seeks further training— has excelled at a set number of courses, as opposed to an academic graduate degree, which requires years of full-time study.
“While at the American College, we teach comprehensive financial planning in a variety of educational programs,” Hopkins says. “The RICP has quickly become our most popular educational program due to its comprehensive view on retirement income planning. In the RICP, we focus a good deal of time on housing decisions for seniors, including best practices and the most current research on reverse mortgages.” The RICP now has enrolled more than 10,000 financial advisors, all of whom will receive education on effective uses of reverse mortgages in a retirement income plan.
Additionally, some lenders have begun to take the RICP to better understand what retirement income professionals are doing. Hopkins points out that the RICP education is extremely valuable for reverse mortgage lenders. And what kinds of things does this research show? Hopkins points out that we must all—professionals in the involved fields and clients alike—be willing to think in realistic terms about risk. We all face, for example, what he describes as “longevity risk;” we don’t know how long we’re going to live or how healthy we’ll be. Indeed, public opinion polls show that more Americans fear “outliving their money” than they fear death. “Retirement income planning is like shooting at a moving target in the wind,” he says. “We don’t know where the target is going to go.
Reverse mortgages can help with longevity risk through tenure payments options and by improving the longevity of one’s portfolio by reducing the risk of sequence of returns risk early in retirement.”
Tenure payment options? Sequence of returns risk? Yes. We must learn these terms, too. Talking to a professor who has something important to teach can change the world for us, but also requires that we be willing to do some work.
All those generations coming after the Baby Boomers must start thinking about these things, too.
(This articled was published in the March-April 2016 edition of Reverse Mortgage magazine.)