By James V. DeLuccia, PICPA manager, learning content

Typically, someone’s house is their largest asset, and therefore it should be a valuable component to their retirement plan. I sat down with Jamie Hopkins, JD, LLM, CFP, director of retirement research with Carson Wealth, to discuss how financial planners should be addressing this issue with their clients. Hopkins spoke at greater length on this topic at PICPA’s 2019 Personal Financial Planning Conference on Nov. 7, 2019, at Penn State Great Valley in Malvern, Pa.

Why should financial planners consider housing in their clients’ retirement plans?

For many Americans heading into retirement, their house is their largest asset. Additionally, the largest expense for most retirees is home costs. This means the house is the largest asset and the largest cash outflow expenditure.

Any adviser looking to give a comprehensive retirement income plan needs to include the home. I’ve stated many times before that ignoring home equity in retirement is one of the biggest failures of financial advisers today. At a minimum, find out where the client wants to live, discuss mortgages, downsizing, and how the client wants to use home equity in retirement.

How does debt management, through mortgage products, affect retirement security?

Many Americans enter retirement with a mortgage. This creates a cash outflow event, requiring retirees to generate more retirement income each month to meet expenses.

Every retiree should be asked why they still have a monthly mortgage payment. Does it make sense to keep adding equity to their home by paying down their mortgage? Or does it make more sense to downsize and pay off the mortgage, or to refinance the existing mortgage to a reverse mortgage so as to eliminate the monthly mortgage payment?

There is no one “correct” answer, but these are questions retirees need to consider. Refinancing an existing mortgage into a reverse mortgage can improve cash flow. In some cases, where a retiree has limited income sources or mediocre credit scores, a reverse mortgage refinance can even reduce mortgage interest rates, thereby making the overall mortgage less expensive.

What are a few features of a Home Equity Conversion Mortgage?

The Home Equity Conversion Mortgage (HECM) allows homeowners to tap into home equity for a more financially secure retirement. Homeowners must be at least 62 years old and use the home as their primary residence. HECMs can provide an annuity style payment, serve as a line of credit, help purchase a home, or create a lump-sum cash payout.

They have similar closing costs and interest rates to traditional mortgages, but they require 2% of the home value in most cases in the FHA insurance fund to help secure the mortgages in case the house becomes worth less than what’s owed.

You can read more about HECMs in this story by Jamie Hopkins on Forbes.com. 

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