A financial advisor recently called me about a 68-year-old retired client in California. His home is worth approximately $650,000 and has only a $6,000 home equity line of credit against it. He has limited retirement savings and has been relying, in part, on withdrawals from his IRA to support his retirement.
The advisor wasn’t particularly concerned about the house. He was concerned about what was happening everywhere else on the client’s balance sheet.
The Challenge
The client had accumulated approximately $60,000 in credit card debt, with interest rates ranging from 20% to nearly 30%. Those payments were putting increasing pressure on his monthly cash flow, and his IRA was being tapped to help meet his expenses.
His advisor recognized the larger problem. This wasn’t simply $60,000 of expensive debt. Continuing to service that debt could require additional taxable IRA withdrawals and potentially accelerate the depletion of retirement assets that were already limited.
Rather than simply accepting that cycle, the advisor suggested that his client become educated about another possibility: Could some of the substantial equity in his home be used to improve the overall retirement plan?
The Client Was Skeptical
Like many homeowners I speak with, the client wasn’t immediately enthusiastic about the idea of a reverse mortgage. But his advisor wasn’t telling him to get one. He was encouraging him to understand his options before making a decision.
Once we looked at the numbers, the conversation began to change.
The Planning Opportunity
The newly restructured reverse mortgage could provide approximately $200,000 of borrowing capacity. We discussed using a portion to pay off the existing $6,000 HELOC and approximately $60,000 to eliminate the high-interest credit card debt.
At an expected interest rate of approximately 7.25%, the client would potentially be replacing debt costing 20% to 30% with significantly lower-cost borrowing.
But debt consolidation wasn’t the only planning objective. The strategy could also improve cash flow, reduce pressure on the IRA, preserve retirement assets and increase future liquidity.
The “Aha” Moment
This is where the case became particularly interesting.
After eliminating the HELOC and approximately $60,000 of credit card debt, the client could still have about $133,400 available in a growing reverse mortgage line of credit.
If left unused, the illustration shows that line potentially growing to approximately $288,836 at age 78, $625,386 at age 88 and $1.35 million at age 98, based on the assumptions used in the illustration.
So the advisor wasn’t simply helping his client find a less expensive way to deal with today’s debt. He was potentially helping him restructure the balance sheet while creating another source of liquidity for tomorrow.
What Happens Next?
This is still a planning conversation, not a completed success story. The client now has information he didn’t have before and can work with his advisor to decide whether this strategy makes sense for his circumstances.
And that’s exactly why I like this case.
The advisor didn’t begin with a reverse mortgage. He began with a client problem. He recognized that high-interest debt was affecting cash flow and putting pressure on limited retirement assets, then looked beyond the investment portfolio for another potential solution.
The Advisor Lesson
The lesson isn’t that retirees with credit card debt should get reverse mortgages. That would be far too simplistic.
The lesson is that when a retired client is servicing debt at 20% to 30% while simultaneously withdrawing money from retirement accounts, it may be time to look at the entire balance sheet.
For this client, approximately $580,000 of home equity was sitting alongside limited retirement savings and very expensive consumer debt. His advisor recognized the disconnect and started a conversation.
A Question for Advisors
If one of your retired clients is withdrawing money from an IRA while carrying high-interest debt, have you explored whether housing wealth could potentially change the equation?
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
- Want faster results? Visit www.HousingWealthCalculator.com and get a 60-second preview of potential reverse mortgage benefits.
Related Articles:
- One $4 Million Home. Two Very Different Tax Outcomes
- How the Reverse Mortgage Line of Credit Grows: Video Tutorial
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.
