With nearly 20% of people age 65 and older facing Medicaid cuts, limited access to long-term care coverage and predictions of a major market correction, this population needs help not from the government or their advisers, but from their largest financial asset — their home.
For the past year, I've been investigating home equity conversion mortgages (HECMs), because a HECM offers elements that can help retirees stay in their homes and generate income for modest budgeted amounts.
In addition, the federal government provides insurance protection for HECMs so that heirs will not owe money after the original owner's passing.
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Using historical results from the past 30 years, I found that a HECM can, in fact, support a modest level of planned-for drawdowns during the early stage of retirement and provide a reasonable amount of liquid savings for, say, unplanned withdrawals. (See my article Treat Home Equity Like Other Investments in Your Retirement Plan: Look at Its Track Record for more on historical results.)
Also, the legacy for children or other heirs in this scenario can be quite attractive.
I continued on my learning exploration when I realized that the majority of homeowners fail to take advantage of a HECM.
That may be because of what I discovered next: When the HECM drawdowns continue for the homeowner's life, and you build in modest inflation (2%) on the drawdowns until 85, the liquid savings are not adequate to support much else. Note in the chart below that the liquid savings in this example ($1 million starting value of home) falls to $170,000 at age 90.
Based on male age 65 for period 1994 to 2024. Home valued at $1 million.
However, because of my training as an actuary and experience in the insurance industry, it became obvious, at least to me, that another government-supported product — a qualified longevity annuity contract (QLAC) — could combine with a HECM's ability to create liquid savings to produce improved retiree outcomes.
As a reminder, QLAC is purchased from an allocation of rollover IRA savings and provides guaranteed lifetime income with the flexibility to select the date (no later than age 85) that annuity payments begin.
It also provides tax savings from the ability to defer required minimum distributions (RMDs) from the QLAC purchase amount.
How do you combine a QLAC with a HECM?
You can use up to $210,000 of your rollover IRA to buy one or more QLACs. Three points here:
- To encourage QLACs, the government increases the aggregate maximum purchase amount each year
- Purchasing more than one QLAC to start income over a number of years allows you to ladder the income start age to create an inflation hedge
- Allocating a large QLAC amount to age 85 creates late-in-retirement cash flow as a hedge against the costs of long-term care
To organize your choices, we have developed a plan called HomeEquity2Income (H2I) that — by adding a QLAC to a HECM — addresses income, legacy and liquidity objectives and lowers taxes and risks.
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Set out below is a graph that shows the impact on income and legacy of combining a QLAC with a HECM with modest drawdowns of $16,000 before age 85. (HECM results are based on historical housing prices and adjustable HECM interest rates.)
Based on male age 65 for period 1994 to 2024. Home valued at $1 million and $200,000 QLAC premium.
In this example, the addition of a QLAC added $800,000 to the HECM legacy proceeds. Combining a QLAC with a HECM also includes income benefits:
- Increasing annual income before age 85 — growing from $16,000 to $39,000
- Continuing annual income for life after age 85 at $39,000
- Total income through age 95 of $900,000 vs $320,000 for a HECM only — a $580,000 advantage
What about liquid savings?
Here, you can see that liquid savings increase substantially when a portion of QLAC payments are used to pay interest on the HECM loan balance, thus increasing your HECM line of credit.
Based on male age 65 for period 1994 to 2024. Home valued at $1 million and $200,000 QLAC premium.
A QLAC increases the HECM liquid savings (as measured from the modest drawdown strategy) from $0.6 million to $1.4 million at age 95, more than sufficient to cover unplanned expenses like long-term care.
Rather than paying down interest, you could use the QLAC payments in other ways, too, including paying caregiver costs or sending it off to the grandkids for college tuition.
To me, those numbers show that HomeEquity2Income is the way to get the most out of your home equity at retirement. Check out H2I here with your own perspective on risk and the amount of income, liquidity and legacy you need and want.
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