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The Six Percent Rule

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Study Shows Increased Portfolio Success with Reverse Mortgage

Reverse Mortgage News

A new Study from IBIS shows benefits of reverse mortgage on investment portfolio. A recent article in the Journal of Financial Planning written by Ibis Software’s Jerry Wagner illustrates the benefits of a reverse mortgage for clients with a retirement portfolio. This study reiterates other studies that show the increased success of investors being able to take out larger sustainable withdrawals from their portfolios each year when using a reverse mortgage strategically. The study centers on what Wagner refers to as the Six Percent Rule in contrast to the traditionally accepted 4% rule.What is the 4% rule? in 1994 Bierwirth and Bengen developed what is known as the 4% rule in the financial planning community. It states that a person planning for  30 year retirement with their portfolio invested 50% in equities or stocks should withdrawal 4% of their initial value in the first year and subsequently increase it each year to adjust for increased cost of living. This strategy purported a 90% success rate.


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  1. Studies on the use of HECMs in retirement are only as strong as their underlying assumptions. If the assumptions collapse due to economic realities, then the value of both the studies and HECMs diminish. For those who view this concept as nothing more than pessimism or negativity, one only needs to look at our own HECM model. Its assumptions proved to be so weak that HUD has taken over $8.2 billion from various sources to underpin the HECM portion of the MMI Fund so that the focus of Congress on the HECM program and HUD’s management of it will be less negative when looking at the impact of HECMs endorsed after September 30, 2008, on the MMI Fund.

    Funds available to the HECM program are unavailable to individual seniors so reliance on any one study is questionable at best.and potentially disastrous. While such studies can validate guidance as to the use of HECM proceeds in specific scenarios, they are not tablets from Mount Sinai.

    Not only do perfect storms and rogue waves occur in nature but in the world of economics as well. When I was in business school there was almost the same unwarranted reliance on the safety of financial institutions as there was in the inability of the Titanic to sink before its maiden voyage. Of course the financial community was awakened first by the collapse of S & Ls, followed by the collapse of dot coms followed shortly thereafter by the revelations of Mr. Madoff and soon, the collapse of residential mortgage securities.

    Many consumers have been disappointed with so called Obamacare. Much of that disappointment was due to the assumptions the President so boldly declared were true when in fact they were not. Whether he knew that or not is not the issue in this comment.

    To promote the idea that senior investments are in line with this index or that is simply false. Those who followed the clean energy investment advice of President Obama and former Vice President Gore not only found out the jobs promised did not materialize but also the stocks in that sector have generally collapsed in 2013 with very few exceptions like Tesla. In 2000 many seniors found out how over weighted they were in dot coms and absorb huge losses which by and large were never recovered.

    It is time we wake up and stop relying on studies to demonstrate how great HECMs can be in retirement and learn to promote the HECM as a reasonable cash flow product which when used early in retirement can reduce the exposure of retirement decumulation plans to risk of failure.

    • I could not have articulated that any better. Well said and well done. WYSIWYG. Studies are just that…Studies. Not to be followed as some kind of foretelling by an Oracle.I especially like your last paragraph.

  2. The core problem with financial planning is simple to state and difficult to solve. The future is unknown yet investment decisions about the deployment of funds must be made. One cannot ignore this reality as doing nothing has its risks as well.

    What can one do. One has to realize, as the Cynic correctly points out, the limits of modeling. or other statistical formulas and not overly rely on their results.

    I would suggest in order to prepare for the “black swan” event perhaps a financial advisor should look at purchasing some insurance in the form of long dated puts on the various segments of the clients’ portfolio as protection.

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