Home Equity: A Hidden Asset
For most Americans, home equity and Social Security benefits represent the two biggest assets on the household balance sheet, frequently dwarfing the available amount of financial assets. Yet, home equity is often relegated to a last-resort option, only to be used once all other resources have been depleted. Research demonstrates that incorporating this hidden asset strategically through a reverse mortgage (specifically the U.S. government’s Home Equity Conversion Mortgage or HECM) can lead to more efficient retirement outcomes.
Early studies led to the counterintuitive finding that coordinating draws from a HECM line of credit throughout retirement can significantly increase the probability of success relative to the conventional "last resort" approach. The reverse mortgage line of credit functions effectively as an alternative buffer asset. Using this asset to reduce portfolio draws when financial markets are down helps mitigate sequence of returns risk—the threat that poor investment returns early in retirement could prematurely deplete a portfolio.
A critical finding is the strong value created by opening a HECM line of credit at the earliest possible age (typically 62). Strategies that open the line of credit early but then delay its use until the investment portfolio is depleted offer the most downside protection for the retirement income plan. This success is achieved because the line of credit grows longer, potentially surpassing the home’s value before it is used, thus providing a bigger base to continue retirement spending after the portfolio is exhausted. Conversely, strategies that spend home equity more quickly generally increase the overall risk for the retirement plan.
To maximize the benefits of strategic home equity use, personalization is key, as no single approach works best for everyone. The Retirement Income Style Awareness (RISA®) Matrix is a valuable framework used to align strategic tools like reverse mortgages with an individual’s unique comfort level. RISA identifies preferences based on two core factors: the desire for guaranteed income (Safety-First vs. Probability-Based) and the need for flexibility (Optionality vs. Commitment).
By understanding their RISA® Profile, a retiree can determine if the high upside potential generated by spending home equity first, or the strong downside protection provided by treating the growing line of credit as a safety reserve, best aligns with their personal style, leading to increased confidence and reduced anxiety. Strategic incorporation of home equity acts as a vital building block in creating a resilient and integrated retirement income plan.
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