Public policy has been the major factor preventing the integration of retirement plan components: financial asset management, annuities and HECM reverse mortgages. As a result, annuities and HECMs are substantially underutilized, potential synergies between them are unrealized, and the retirees who use these markets often overpay.
The result, illustrated by the chart below, is that the spendable funds available to retirees are significantly smaller than they would be if the markets were integrated. The shortfall is particularly large for retirees who have most of their wealth in their homes.
This article shows how two new systems – Retirement Funds Integrator (RFI) and Retirement Saver (RS) – from Mortgage Professor LLC largely overcome deficiencies in retirement planning.
The Needs Met by RFI That Are Not Met Now
As of now, there is no significant integration between any of the components of retirement plans. A major consequence is that both annuities and HECMs are substantially underutilized.
Annuities can increase the spendable funds of retirees by allowing them to share mortality risk with others in the same age bracket. Annuities should be in the retirement plans of almost all retirees except those concerned with estate value, or wealthy enough not to bother. Instead, annuities are promoted only by the insurance agents who profit from them.
HECM reverse mortgages were designed to supplement the finances of elderly homeowners having limited financial assets. Instead, most are deterred by the complexities of the HECM program, and by adverse publicity from journalists who often don’t understand the complexities either. A large proportion of the homeowners who do take HECMs are in financial distress. The upshot is that HECMs are promoted only by HECM loan officers who profit from them.
The limited use of annuities and HECMs can be attributed to private and public barriers. The private barrier is the financial asset management industry where the compensation of advisors is based on the amounts under management. Since purchase of an annuity by the client of a financial advisor is very likely to reduce the assets being managed by the advisor, few of them propose an annuity purchase.
The public sector barrier arises from some incidents early in the life of the HECM program where HECM/annuity combinations were offered at extortionate terms, reflecting the complexities of both instruments and the lack of information available to retirees for dealing with them. HUD which regulates HECM lenders reacted to those incidents by setting barriers between HECM lenders and insurers, and by requiring HECM counselors to warn prospective borrowers of the dangers of annuities.
The NAIC – which represents the state insurance commissioners who regulate insurers – adopted a rule that annuities had to be in the best interest of the client. Insurers have interpreted this to mean that they should not issue an annuity which has been financed with a reverse mortgage.
In sum, public policy at both the Federal and state levels is hostile to annuity/HECM integration, the tools most needed by consumers having low and moderate income.
How RFI Deals With These Barriers
The barriers to integration referred to above arise from the inability of consumers with limited means to develop the retirement plan that best meets their needs, and to shop the components of the plan for competitive prices. RFI covers both, in two stages. Stage 1 is a website directed to consumers that guides them in the development of a retirement plan geared to their capacities and preferences.
Stage 2 is where the consumer consults an RFI advisor licensed to write annuity contracts and certified for competence in developing a retirement plan that is optimal for each retiree. The advisor has access to a system developed by Mortgage Professor LLC that captures all the nitty-gritty features of a retirement plan that are not included in the simpler website to which retirees have access.
In addition, advisors have access to a database covering the prices of HECMs posted by a group of HECM lenders, and a database covering the prices of annuities posted by a group of insurers. Unless the retiree has her own preference, which is very unlikely, the advisor selects the insurer and the lender posting the best prices for the two components of the selected retirement plan.
Retirement Saver (RS) as a Complement to Retirement Funds Integrator(RFI)
There is widespread agreement that consumers don’t save enough, jeopardizing their future and retarding the growth rate of the economy. The list of reasons for inadequate household savings, given by various observers, is long. As examples:
- Inability or refusal to budget expenditures.
- Seductive appeal of credit cards.
- Inability or unwillingness to formulate savings goals.
- Excess expenditures on housing, or automobiles, or clothes, and on and on.
- Social security.
All the reasons for inadequate savings except the last have one feature in common: they value the present more than the future. To some degree, this is inevitable because the present is known and the future isn’t. But the knowledge gap can be substantially reduced by providing greater specificity to the future in the form of well-defined benefits attributed to current savings. The appropriate benefit is a retirement plan enlarged by a savings program earlier in life.
In sum, a savings program can be motivated by the prospect of an enhanced retirement plan. That potential motivated me and my colleagues to develop Retirement Saver (RS) which is fully integrated into RFI. Clicking the link allows a user to compare the impact on retirement of any number of savings programs.
For this to work, the consumer must have access to a prospective retirement plan with and without a savings program. Further, if the consumer is a homeowner and plans to remain in the house, the retirement plan should incorporate a HECM reverse mortgage as an option. This is why we developed the Retirement Saver (RS) as a component of RFI. The case for integration is more fully developed in Unrealized Potential: Savings Accounts In A Retirement Plan (forbes.com).
Availability of RFI and RS
RFI and RS are available to anyone on The Mortgage Professor website.
Depository institutions interested in using RS as a tool for merchandising tax-advantaged deposits can offer it on their sites with their own branding at no charge. A similar offer applies to pension-related and financial web sites. Mortgage Professor LLC looks to cover its costs eventually from the annuity component of RFI transactions, which will be shared with lead sources and advisors who are appropriately licensed.