Video Transcription of “Using Home Equity to Offset Sequence of Returns Risk in Volatile Markets“
Did you know nearly 70% of retirees are concerned about outliving their savings? That fear becomes even more real in today’s volatile market environment. As financial advisors, your role is to help clients navigate uncertainty, especially during market downturns, when every withdrawal from a shrinking portfolio can have long-term consequences.
This is where sequence of returns risk becomes critical. It refers to the risk of withdrawing funds during a market decline. For retirees, this often means selling investments at a loss just to maintain their current lifestyle. If this happens early in retirement, the damage can be lasting, drastically reducing the portfolio’s ability to support them long-term.
Let’s examine an example. A retiree starts with a $500,000 portfolio. In the first year, the market drops 20%, reducing the value to $400,000. If they withdraw $40,000 to cover expenses, the remaining balance drops to $360,000. Even if the market rebounds 20% the following year, the portfolio only grows back to $432,000, not back to $500,000. Why? Because a 20% gain on $360,000 is just $72,000. The earlier loss combined with the withdrawal becomes much harder to recover from. That’s a $68,000 shortfall, even though the market has technically recovered.
Now imagine a different approach. Instead of withdrawing from investments during a downturn, the retiree uses home equity to meet their cashflow needs, giving their portfolio time to bounce back. This is where home equity coordination becomes a powerful strategy.
Traditionally, housing wealth has been treated as a last resort asset in retirement planning, but that mindset is shifting—and for good reason. Research shows that ignoring home equity in retirement planning leads to far less efficient outcomes. Using it strategically and proactively via a reverse mortgage can improve long-term stability and reduce risk.
One of the most flexible tools available is the HECM line of credit designed for homeowners 62 and older. The Home Equity Conversion Mortgage, or HECM line of credit, allows access to a portion of home equity as needed without requiring a home sale or monthly mortgage payments as long as the borrower lives in the home and stays current on taxes, insurance, and other property charges.
Unlike a traditional HELOC, a HECM reverse mortgage line of credit is non-cancelable due to market conditions, and the unused portion grows over time at the same rate as the loan balance, increasing future borrowing capacity, even if home values decline. At Fairway, we refer to this strategy as the “HECM lifeboat.”
Let’s see it in action. Let’s compare two strategies using historical S&P 500 data from the last 25 years. In scenario one, a retiree consistently withdraws $25,000 annually (5% of their $500,000 portfolio) regardless of how the market performs. By the end of 2003, because of consecutive down years in the market, the portfolio dropped below $300,000. After 25 years, the portfolio balance is approximately $200,000.
In scenario two, the retiree establishes a $200,000 HECM line of credit and pulls 5% from their investments in up years and uses a HECM line of credit in the down years. By the end of 2003, the portfolio balance is about $375,000. After 25 years, it grows to over $1.1 million, nearly five times the result from the non-coordinated strategy. On top of that, thanks to HECM line of credit growth, the client maintains access to more than $450,000 in the HECM line of credit for future use.
Of course, a HECM loan balance would eventually need to be repaid when the borrower no longer lives in the home. But even factoring in paying off the loan balance, their net assets at the 25-year mark would still be significantly higher.
Are you ready to see how it adds up? Contact your local Fairway retirement mortgage specialist. For any of your clients, the HECM line of credit offers flexibility, liquidity, and downside protection, giving retirees peace of mind and portfolios time to potentially rebound. If it’s not in your toolkit yet, it just might be time to take a closer look.
