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5 Ways Retirees Can Prepare for a Recession…in Reverse

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If there’s one thing that can upend retirement plans it’s a recession which an increasing consensus of economists are predicting for the US economy. Indicators like a weakening labor market, stubbornly high inflation, and declining manufacturing activity all point to a potential economic slowdown. So, how can retirees or those nearing retirement brace for impact?

Let’s examine the five most common strategies economists and financial columnists suggest for retirees to best prepare for a recession and how a reverse mortgage could play an important role.

5 Ways to Prepare for a Recession 

1. Boost Your Savings.

For older Americans nearing retirement, it’s essential to have sufficient savings to handle unexpected challenges. For those still working, the biggest threat might be an unforeseen layoff. Having enough savings to cover expenses while applying for unemployment or searching for a new job can mean the difference between a financial crisis or a temporary setback.

Solution: A reverse mortgage could offer a lifeline for those aged 55 and over. It allows homeowners to access their home’s equity, potentially eliminating the need to find new employment. Even if they choose to keep working, a reverse mortgage can free up money by eliminating monthly mortgage payments, which can be redirected into savings or investments during their working years.

2. Pay down debt.

Debt is the bane of retirement. The burden of monthly payments saps away at a retiree’s quality of life or could prevent one from retiring altogether. As Dan Hultquist highlighted in a recent interview, strategies like the debt snowball method can help pay off debts faster. However, a more effective approach may be a “debt avalanche,” which pays down high-interest debt first. However, a debt avalanche could be employed by transforming high-interest debt into a payment-optional HECM Consolidation Loan. 

Solution: Older homeowners struggling with debt may benefit from consolidating it into a reverse mortgage, which can eliminate the burden of monthly payments. This can provide much-needed financial relief by eliminating the burden of mandatory mortgage payments. 

3. Build an Emergency Fund to Ride Out Market Downturns

What could go wrong with a stock portfolio in a recession? A lot.  As AARP pointed out in its June 2022 blog, retirees should aim to have a cash reserve that covers up to a year’s worth of expenses. This fund can help them avoid selling investments in a down market or shortening their sustainable withdrawals 

Solution: A HECM (Home Equity Conversion Mortgage) line of credit could accomplish the same thing allowing a retiree to tap into funds as needed and avoiding the sequence of returns risk inherent in selling equities in a down market. 

4. Diversify Your investments

Diversification is a key principle for any retirement portfolio, especially as one approaches retirement. This typically means spreading investments across different asset classes to minimize risk. But for many retirees, their largest asset is their home, which is often not factored into diversification strategies.

Homeowners measure their home’s worth by its market value and accumulated equity. The rub is that home equity is neither safe nor accessible until the homeowner sells the home or separates some of the equity with a mortgage loan. 

Solution: A HECM is especially well suited to secure a significant portion of home equity with a variety of payout options. For example, a HECM borrower with a $120,000 line of credit for their home which appraised at $550,000 doesn’t have to worry about qualifying for a future cash-out refinance or HELOC if home values fall. They’ve already secured access to part of their home’s value outside of future market fluctuations or changing credit conditions.

5. Create Consistent Monthly Income with an Annuity

Many retirees turn to annuities to generate steady monthly income. With annuities, individuals contribute either a lump sum or make premium payments over time. Later the retiree can receive monthly payouts during the annuitization phase, either for life or for a fixed period.

Solution: A Home Equity Conversion Mortgage (HECM) can function in much the same way. A homeowner could leave their HECM line of credit to grow and later convert it to monthly tenure payments or term payout for a fixed number of years. 

Conclusion

While recessions are an inevitable part of the economic cycle, their effects can be particularly tough on retirees or those nearing retirement, who may have limited time to adjust. Fortunately, homeowners can take proactive steps to protect their finances, and one of the most powerful tools available is a reverse mortgage. By unlocking the equity in their homes, retirees can navigate economic downturns with greater confidence and financial flexibility. 

Shannon Hicks

Editor in Chief: HECMWorld.com
 
As a prominent commentator and Editor in Chief at HECMWorld.com, Shannon Hicks has played a pivotal role in reshaping the conversation around reverse mortgages. His unique perspectives and deep understanding of the industry have not only educated countless readers but has also contributed to introducing practical strategies utilizing housing wealth with a reverse mortgage.
 
Shannon’s journey into the world of reverse mortgages began in 2002 as an originator and his prior work in the financial services industry. Shannon has been covering reverse mortgage news stories since 2008 when he launched the podcast HECMWorld Weekly. Later, in 2010 he began producing the weekly video series The Industry Leader Update and Friday’s Food for Thought.
 
Readers wishing to submit stories or interview requests can reach our team at: info@hecmworld.com.

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1 Comment

  1. There are jobs we all dread but many times those jobs provide higher income and better employee benefits. Maybe a solution is to replace the disliked job during retirement with one that is far more enjoyable; while perhaps not making as much, a senior may be able to extend how long (s)he works. If needed the proceeds from a reverse mortgage can make up the shortfall. Many have seen retirees leave their professions and try to fully retire only to find they hate that even more. Why not plan to switch professions in retirement, so that you dread the days you don’t work more than the days you do?

    Such a strategy can also mean less lost in SSBs (Social Security benefits) before reaching “full retirement” age since the amount earned is less. It may also mean less income tax paid on “taxable” SSBs. (Many times waiting until at least full retirement age before receiving SSBs is just throwing away the pre-full retirement age SSBs).

    This is one of the many reasons, seniors need help in planning retirement from those who actually are competent in such matters. As Shannon is known for saying, “stay in your own lane” as much as possible.


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