Reverse Mortgage Vs. 4% Rule

I did a video this morning on Wade Pfau’s article looking at Reverse Mortgages compared to the 4% rule. See the link above to watch. His article is here, by the way. Remember, Wade literally wrote the book on reverse mortgages. So he knows a thing or two about these products.

What I like about Wade, though, is he is not a salesman, hawking products to unsuspecting people like this guy…

Wade is just a researcher. That’s it. Research is what he does. And his research is very, very valuable for anyone considering retiring.

In the aforementioned article, Wade looks at how a reverse mortgage in conjunction with a portfolio would have fared vs. the traditional 4% rule starting in 1966. As I’ve stated repeatedly, if you can survive the 1966 through 1982 years, you can survive pretty much anything, save for a Bolshevik revolution.

In fact, the entire premise of the 4% rule was that was the maximum one could have withdrawn from their portfolio and still had money left over after 30 years if starting in 1966. Unfortunately, what most don’t tell you is that you only had a couple hundred bucks left after those 30 years. So, if you lived 30 years and a few months, you were in a world of hurt.

(On a side note, that’s been my issue with Monte Carlo analysis and Safe Withdrawal Rates from the get-go. Yes, you had money left at the end of the time, but HOW MUCH??? Secondly, if you ran out of money but had ample coverage from pensions and/or Social Security, the analysis said you failed, but did you??? UGH!)

So, going back to Wade’s article, we find someone who did a reverse mortgage for one year, after the horrific 1973-1974 cratering, would not only have money left after 30 years but would have had nearly $200k MORE than the traditional 4% rule. Oh, and that includes fees too. In fact, that includes the highest possible fees you could pay. Don’t do that. But Wade shows it to prove he’s not cherry picking data, like other researchers in a different field do all the time. (I’ll just say Greenland and let you do some research as to what I’m talking about.)

Even more to the point about the benefits of the reverse mortgage vs. the traditional 4% withdraw is what a commentator wrote:

Julio Lopez-Brito – 27 Apr 2019 14:48

From a diversification point of view:

Original position: 16% Home/ 84% investment portfolio

End position:

Scenario 1: 100% Home (99.96%)
Scenario 2: 30% Home / 70% investment portfolio
Which one is riskier strategy?

Now I don’t know who this Julio guy is, I actually tried to look him up via the website he linked to, but was unable. But I couldn’t agree more with his assessment. Asset class diversification is smart. No reverse mortgage means that one has ALL his assets in the home at the end of this scenario. Now that is a very risky strategy indeed.

There are some areas we could argue, I suppose…if you’re really that bored. RMDs. Taxes to heirs. Real estate values…etc. These arguments, while valid, are tertiary issues, to be honest.

The first main issue is will a reverse mortgage allow the retiree to maintain his lifestyle in retirement? Answer… Yes, unequivocally, in this example.

Second issue, will the reverse mortgage deplete or enhance assets left to heirs? In this example, enhance, and significantly too.

Will the same happen to you? I’ve no clue. But being able to model the 1966-1982 time frame and come out smelling like roses is a pretty good starting point for me.

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