Market highs and lows are a natural part of investing, but their impact becomes much more critical as you approach retirement. Even with a well-structured retirement portfolio, sudden market dips can pose a dilemma: Should you sell investments during a downturn, knowing you’re locking in losses? This situation is a key part of what financial professionals call “sequence of returns risk”—the timing of withdrawals from your portfolio can significantly affect the longevity of your savings.
When you’re retired and relying on your investments for income, selling during a market slump can limit your portfolio’s potential to recover when things turn around. For many retirees, this can quickly lead to a precarious financial situation. So, how do you navigate these uncertain times without jeopardizing your hard-earned nest egg?
In this installment of our “Reversing Retirement Challenges” series, we’ll cover savvy home equity strategies that you can consider or discuss with a trusted financial planner. These strategies can help create a financial buffer to shield your investments, allowing them time to recover while maintaining the cash flow you need.
The Challenge: Timing Withdrawals and Market Volatility
Retirement can feel like walking a financial tightrope, especially when it comes to the unpredictable nature of the market. After years of building your portfolio, you’re finally ready to reap the rewards—until the market takes a sudden dip. At this point, selling off investments to cover your living expenses can feel like a double blow. Not only are you locking in losses, but you’re also limiting your portfolio’s potential for future growth.
In your younger years—during your 30s, 40s, or even 50s—market fluctuations were easier to manage because time was on your side. You could ride out the dips, confident your investments would recover in the long run. But as retirement approaches, the stakes are much higher. Without a steady paycheck to fall back on and less time for your investments to bounce back, a market dip could force you to withdraw at the worst possible time.
This predicament is the essence of sequence of returns risk—drawing from your portfolio during a market downturn can significantly shorten the lifespan of your retirement savings.
The Solution: Using Home Equity to Protect Your Portfolio
A Home Equity Conversion Mortgage (HECM)—commonly known as a reverse mortgage—can be a valuable tool for strategically protecting your savings from market volatility. This financial product allows you to tap into the equity of your home to unlock additional cash flow without the need for monthly mortgage payments (as long as you keep up with property taxes, insurance, and maintenance). By leveraging your home equity, you boost your cash flow while continuing to live in and fully own your home.1
This can be especially beneficial during market downturns when withdrawing from your investment accounts might lock in losses. Instead of selling off investments to cover living expenses, a reverse mortgage provides flexible disbursement options for accessing proceeds, such as through a line of credit2 that grows over time.3 This allows your investment portfolio to remain intact and recover from market fluctuations while you maintain the cash flow needed to support your lifestyle.
For example, consider a homeowner approaching retirement with a fully paid-off home. By establishing a reverse mortgage line of credit,2 they create a financial safety net that expands over time. Rather than dipping into investment accounts during a market dip, they can use their home equity to manage expenses. This strategy not only helps preserve their investment portfolio but also ensures greater financial flexibility as the line of credit increases.3
Creating a Unified Strategy with a Reverse Mortgage
Incorporating a reverse mortgage as part of your overall financial strategy can help streamline your retirement plan, protect your investments, and maximize other sources of income, like Social Security.4 This unified approach allows you to use your home equity to tackle multiple financial goals at once, from consolidating debt to covering living expenses without touching your portfolio during volatile times.
For example, imagine a 67-year-old homeowner who owns a home but has significant debt from credit cards and a Home Equity Line of Credit (HELOC). Even without a traditional mortgage, this debt can be a financial burden. By using a reverse mortgage, they can:
- Consolidate existing debts into a lump sum, alleviating the stress of high-interest payments.
- Opt to delay collecting Social Security4 to maximize future benefits while receiving regular payments from the reverse mortgage in the meantime.
- Establish a growing line of credit2,3 that provides a safety net for future financial needs and helps manage market fluctuations. This line of credit can offer access to funds when needed, allowing them to avoid drawing from their investments during downturns.
This strategy not only simplifies financial management but also enhances your ability to handle market volatility, ensuring a more secure and flexible retirement. As always, it’s best to discuss your specific financial needs with a trusted financial planning professional.
The Takeaway
Sequence risk and the need to liquidate assets during market downturns can pose serious challenges for retirees, but leveraging a reverse mortgage offers a practical solution. By using your home equity as a financial buffer, you can help protect your investment portfolio, reduce the need to sell during market downturns, and maximize the potential of your financial resources.
Ready to see how a reverse mortgage could enhance your retirement strategy? At Longbridge Financial, we’re here to guide you every step of the way. We understand that financial decisions are important ones, which is why we’re dedicated to taking the time to understand your goals, your home, and your financial situation as we explore your options.
For more details or to find out how much cash you might qualify for with a reverse mortgage, contact the Longbridge team today.
Keep an eye out for the next blog in our “Reversing Retirement Challenges” series! We’ll be diving into how you can use your home equity to ‘rightsize’ to a new home—while boosting your cash flow and protecting retirement savings.
