The reverse mortgage as a retirement lifeline

Most retirees treat their home equity as a last resort, but a growing body of research suggests that thinking is backward. Used strategically, a home equity conversion mortgage (HECM) line of credit can work as a volatility buffer. When the market drops, you can withdraw cash, tax-free, to avoid selling investments at the wrong time.

The strategy has real merit and real costs. Both are worth understanding before you decide.

Read:Many homeowners are putting their retirement in jeopardy

The problem a reverse mortgage solves

The risk of return volatility can hurt retirement plans. Not average returns, but the order in which they arrive. A bad stretch in your first few years of retirement, while you're still drawing down, can permanently damage your portfolio that, if left alone, might have recovered just fine.

Cliff Auerswald, president of All Reverse Mortgage, said, "When the market tanks, you don't want to be pulling money out of your portfolio to cover living expenses because you're locking in losses. Wade Pfau's research showed that having a buffer asset to tap during down years, rather than the portfolio, could literally be the difference between running out of money and ending up with millions."

That's the core logic. When markets fall 15 or 20 percent, you start drawing from the HECM to cover expenses and leave your portfolio alone until things stabilize, he said. Once the market recovers, you can return to drawing investments and stop using the line.

The research

The Sacks and Sacks study modeled this strategy across historical market cycles. It found that the coordinated use of an HECM line of credit and an investment portfolio produced better outcomes than drawing solely from the portfolio. Pfau has also written extensively on reverse mortgages as retirement income tools. His modeling on buffer strategies is worth reviewing if you want to stress-test the numbers for your own situation.

Why an HECM and not a HELOC

The comparison between the two regularly trips people up, said Auerswald. "A HELOC (Home Equity Line of Credit) appears simpler and cheaper on the front end, and it is. But a lender can freeze your HELOC whenever they want," he said. "In 2008, banks began freezing HELOCs when people needed them most. Once in place, banks can't freeze an HECM. Period. It's a federally insured guarantee."

Another difference between the two? A HELOC credit limit can't increase. Whatever it is on day one is the same in year five or ten. The HECM line grows every year you don't use it, said Auerswald. "A HELOC also requires monthly payments, which is the opposite of what you want when you're trying to reduce cash outflow during a downturn," he said. "A HECM has no monthly mortgage payment."

The downside of an HECM

The costs are real. Auerswald said, "Up front, you're looking at origination fees, the FHA mortgage insurance premium, which is 2% at closing, plus standard closing costs. On a $400,000 home, that can run $16,000 to $20,000 depending on the situation."

And then there's the compounding interest. At current fixed rates of 7.5-8%, the balance roughly doubles every 9 to 10 years. So if someone draws $100,000 at age 72 and lives to age 90, the balance due could be close to $400,000. That's real money coming out of the estate, said Auerswald. "While heirs will never owe more than the home's value, thanks to the non-recourse clause, it doesn't protect the inheritance from being substantially reduced."

Joe Braier, CEO of Lake County Advisors, puts it simply: "The longer you borrow against your home, the less equity you'll have to pass to your heirs."

"When the market tanks, you don't want to be pulling money out of your portfolio to cover living expenses because you're locking in losses. Wade Pfau's research showed that having a buffer asset to tap during down years, rather than the portfolio, could literally be the difference between running out of money and ending up with millions."

The 12-month rule most people miss

Braier and Auerswald flagged this important rule. If a borrower moves into a nursing home or assisted living facility for more than 12 consecutive months, the loan comes due. For anyone with a realistic possibility of needing long-term care in the next several years, that rule changes the calculus. Auerswald said an HECM is probably not the best tool in that case.

An alternative worth knowing

Alex Barba, founder of Lifeforce Financial, raises an option that rarely arises in this conversation: life settlements. For clients carrying a life insurance policy they no longer need, selling it can generate a lump-sum payment that functions as a volatility buffer without adding debt or housing risk.

"It might not be the best fit for everyone," he said, "but with no compounding interest or housing risk attached, it might be worth asking about if you're in this position."

Who benefits from an HECM

This strategy fits a specific profile:

• Substantial home equity
• A low or paid-off mortgage balance
• A plan to stay in the home
• No strong intent to leave the property to heirs

Set up early, the line grows unused until markets give you a reason to draw from it. Used correctly, it's a strategy for letting your portfolio recover without selling into a downturn. Used without understanding the costs, it can quietly transfer a big chunk of home equity to interest over time.

The best time to open an HECM line of credit? Before you need it. By the time markets are down 20%, it's too late to set one up. Granted, it's not a product for everyone, but for the right situation, it's one of the retirement tools that becomes more valuable the longer you leave it alone.

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This story was originally published May 28, 2026 at 9:47 AM.