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If there’s one thing that can upend retirement plans, it’s a recession which an increasing consensus of economists are predicting for the US economy. Indicators like a weakening labor market, stubbornly high inflation, and declining manufacturing activity all point to a potential economic slowdown. So, how can retirees or those nearing retirement brace for impact?
Let’s examine the five most common strategies economists and financial columnists suggest for retirees to best prepare for a recession and how a reverse mortgage could play an important role.
5 Ways to Prepare for a Recession
1. Boost Your Savings.
For older Americans nearing retirement, it’s essential to have sufficient savings to handle unexpected challenges. For those still working, the biggest threat might be an unforeseen layoff. Having enough savings to cover expenses while applying for unemployment or searching for a new job can mean the difference between a financial crisis or a temporary setback.
Solution: A reverse mortgage could offer a lifeline for those aged 55 and over. It allows homeowners to access their home’s equity, potentially eliminating the need to find new employment. Even if they choose to keep working, a reverse mortgage can free up money by eliminating monthly mortgage payments, which can be redirected into savings or investments during their working years.
2. Pay down debt.
Debt is the bane of retirement. The burden of monthly payments saps away at a retiree’s quality of life or could prevent one from retiring altogether. As Dan Hultquist highlighted in a recent interview, strategies like the debt snowball method can help pay off debts faster. However, a more effective approach may be a “debt avalanche,” which pays down high-interest debt first. However, a debt avalanche could be employed by transforming high-interest debt into a payment-optional HECM Consolidation Loan.
Solution: Older homeowners struggling with debt may benefit from consolidating it into a reverse mortgage, which can eliminate the burden of monthly payments. This can provide much-needed financial relief by eliminating the burden of mandatory mortgage payments.
3. Build an Emergency Fund to Ride Out Market Downturns
What could go wrong with a stock portfolio in a recession? A lot. As AARP pointed out in its June 2022 blog, retirees should aim to have a cash reserve that covers up to a year’s worth of expenses. This fund can help them avoid selling investments in a down market or shortening their sustainable withdrawals
Solution: A HECM (Home Equity Conversion Mortgage) line of credit could accomplish the same thing allowing a retiree to tap into funds as needed and avoiding the sequence of returns risk inherent in selling equities in a down market.
4. Diversify Your investments
Diversification is a key principle for any retirement portfolio, especially as one approaches retirement. This typically means spreading investments across different asset classes to minimize risk. But for many retirees, their largest asset is their home, which is often not factored into diversification strategies.
Homeowners measure their home’s worth by its market value and accumulated equity. The rub is that home equity is neither safe nor accessible until the homeowner sells the home or separates some of the equity with a mortgage loan.
Solution: A HECM is especially well suited to secure a significant portion of home equity with a variety of payout options. For example, a HECM borrower with a $120,000 line of credit for their home which appraised at $550,000 doesn’t have to worry about qualifying for a future cash-out refinance or HELOC if home values fall. They’ve already secured access to part of their home’s value outside of future market fluctuations or changing credit conditions.
5. Create Consistent Monthly Income with an Annuity
Many retirees turn to annuities to generate steady monthly income. With annuities, individuals contribute either a lump sum or make premium payments over time. Later the retiree can receive monthly payouts during the annuitization phase, either for life or for a fixed period.
Solution: A Home Equity Conversion Mortgage (HECM) can function in much the same way. A homeowner could leave their HECM line of credit to grow and later convert it to monthly tenure payments or term payout for a fixed number of years.
Conclusion
While recessions are an inevitable part of the economic cycle, their effects can be particularly tough on retirees or those nearing retirement, who may have limited time to adjust. Fortunately, homeowners can take proactive steps to protect their finances, and one of the most powerful tools available is a reverse mortgage. By unlocking the equity in their homes, retirees can navigate economic downturns with greater confidence and financial flexibility.
By Shannon Hicks, September 10, 2024