For decades, a common approach to retirement income planning has been maintaining one to two years of cash reserves so retirees can fund spending without being forced to sell investments during market downturns. This cash bucket can serve as a shock absorber, helping protect the portfolio from volatility and sequence-of-returns risk.

Around 2012, Dr. Harold Evensky, one of the pioneers of modern financial planning and an early advocate of the retirement income “bucket strategy,” began researching another approach: incorporating a HECM line of credit as a standby resource that could allow retirees to keep more of their assets invested.

Watch the Wharton Presentation

In the video below, Dr. Evensky presents at the Wharton School of the University of Pennsylvania.

What he shared surprised many in the room.

Here was one of the most respected voices in financial planning openly discussing how a reverse mortgage could be incorporated responsibly as a retirement income risk-management tool.

The Big Idea: Rethinking the Retirement Cash Reserve

Evensky’s concept is relatively simple, but powerful. Instead of keeping 12 to 24 months of spending entirely in cash, which may create a drag on long-term returns, an eligible retiree could maintain a smaller cash reserve while establishing a HECM line of credit as an additional source of standby liquidity.

During normal markets, retirement income can continue to come from the investment portfolio as planned, but when markets decline, the retiree may temporarily draw from the HECM line of credit rather than selling investments at depressed values to meet spending needs. When markets recover, portfolio withdrawals can resume, and the homeowner has the option of making voluntary repayments to the HECM, restoring borrowing capacity for potential future use.

The key is not necessarily how often the line of credit is used, but rather having another source of liquidity available when selling portfolio assets may be particularly damaging. In that sense, the standby HECM line of credit can function as a risk-management backstop, potentially helping the retirement plan weather market volatility and better manage sequence-of-returns risk.

Why Evensky’s Work Matters

Dr. Harold Evensky has spent decades helping shape the financial planning profession as the founder of Evensky & Katz/Foldes Wealth Management, a former professor of personal financial planning at Texas Tech University, and one of the pioneers of the retirement income “bucket strategy.”

That makes his exploration of housing wealth particularly noteworthy. This wasn’t someone from the mortgage industry promoting a mortgage product. It was a financial planner asking a financial planning question:

Could housing wealth be coordinated with investment assets to improve retirement outcomes?

The Research That Helped Bring the Strategy Into the Mainstream

Evensky, John Salter and Shaun Pfeiffer went on to examine the strategy in the Journal of Financial Planning.

Their research explored using a standby reverse mortgage as a risk-management tool for retirement distributions, particularly during periods when drawing from investment accounts could require selling assets after significant market declines.

The work helped move the conversation beyond viewing reverse mortgages primarily as a loan of last resort and toward examining housing wealth as another asset that could potentially be coordinated with the retirement portfolio.

That changes the conversation from:

“Does my client need a reverse mortgage?”

to:

“What role could housing wealth play in this client’s retirement income plan?” Standby Reverse Mortgages: A Risk Management Tool for Retirement Distributions

Probability vs. Consequence: The Planning Lens Evensky Emphasizes

One of the concepts I appreciate most from Evensky is his distinction between probability and consequence.

Good retirement planning isn’t only about determining what is most likely to happen. It also means considering the consequences if our assumptions are wrong.

As Evensky explains:

“It’s not just the probability. It’s the consequences. You may plan to age 85 and not live that long. But the risk of being wrong, running out of money, and living five more years is fairly catastrophic. So we need not just to think in terms of probabilities, but to balance the consequences.”

That is ultimately what makes the housing wealth conversation interesting.

The question isn’t simply whether a client will need to access the HECM line of credit.

The planning value may also be in having another source of liquidity available if and when the retirement plan encounters an unfavorable market at an unfavorable time.

For Advisors Who Want to Go Deeper

Standby Reverse Mortgages: A Risk Management Tool for Retirement Distributions
John Salter, Shaun Pfeiffer and Harold Evensky
Journal of Financial Planning, August 2012
Read the research

Increasing the Sustainable Withdrawal Rate Using the Standby Reverse Mortgage
Journal of Financial Planning, December 2013
Read the research

For more information about Dr. Evensky and his work, visit Evensky & Katz/Foldes Wealth Management.

To learn more about incorporating housing wealth into modern retirement income planning, explore the resources at the Housing Wealth Institute.

What to Do When You Have a Client or a Case?

• Go to www.HousingWealthPro.com and request a Housing Wealth Illustration. Give Details in the “Notes” Section including the clients’ phone # if they would like a Housing Wealth Assessment. You can also
• Schedule a Time to Speak with Me: Click Here

Related Articles:

• How Did Reverse Mortgages Get Such a Bad Reputation?
• Morgan Stanley and Charles Schwab Say It’s Time to Rethink the Role of Home Equity in Retirement

• Reverse Mortgages Are Global: 24 Countries Beyond the U.S. Are Embracing Housing Wealth

The content of this blog is for financial advisors and professionals only and is not intended for consumer use. Names, cases, and scenarios are fictionalized for illustrative purposes. The opinions expressed here are those of the author alone and do not reflect the views of any affiliated entities or individuals. Don Graves, NMLS #142667.