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Stock Market Losses & Reverse Mortgages


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Retriees Ignoring Home Equity May Pay Dearly in a Down Market

reverse mortgage newsUnless your television has been turned off for the last week you have seen the stock market’s plunge due to China’s currency crisis and crude oil prices. With more advisors embracing the strategic use of a HECM to prolong investment portfolios and more retirees taking a do it yourself approach to retirement reverse mortgages are positioned more than ever before to provide a timely solution.

Last September an article in the Wall Street Journal articulated how HECMs can be used to buffer against market swings and sequence risk. For those relying heavily on stocks and equities as a source of income the sequence of their withdrawals can have long-lasting effects, especially when one sells investments during a market downturn. Pfau and other notable financial professionals have championed the benefits the HECM’s line of credit in a standby reverse mortgage strategy, drawing from the credit line when portfolios have lost value rather than selling stocks for a loss in a down market.
Beyond the role advisors play in shaping retirement strategies more retirees are taking a hands on do-it-yourself strategy to…

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  1. While I absolutely believe in the Standby HECM Strategy, I also believe it must be secondary to having all assets put to their best and highest use. This will never be a stock and equity strategy but one that employs stocks, equities, bonds, other secured forms of debt, and real estate. Without minimal diversification, one is doomed to failure. Age requires greater diversification tending to some percentage in liquid assets or adjustable rate HECMs.

    I prefer HECMs over cash because assets that would otherwise be tied up as cash can be put to work in low risk income producing assets.

    There is a general misunderstanding about annuities in our society today. They work just like a 30 year fully amortizing mortgage does for a mortgagee where the highest amount of income is earned economically at the start of the payout diminishing to almost nothing by the end of the distribution cycle. What annuities provide is just like the thirty year mortgage to the mortgagee, a steady stream of cash flow. It seems today we are lost as to what cash flow is and what income is. Like Venn diagrams, they have areas where they intersect but they also very, very different where they do not.

    Stocks and other equities are generally not invested into for income purposes but rather growth which results in gains. There are income producing stocks but they usually pay out slightly higher dividends than their corresponding bonds pay out interest. It is surprising how many financial people get their terminology absolutely confused and are therefore misunderstood more than they should be.

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