Reverse Mortgage: A Financial Planning Tool for the Retirees— Case Study Approach in India

Abstract

Reverse mortgage has always been viewed as a product meant exclusively for the elderly with financial hardship. However, there is a brighter side to it too. This article attempts to project reverse mortgage as a financial planning tool through a case study analysis. Using the coordinated strategy, this case explores how the line-of-credit option in reverse mortgage can meet the cash needs of a retiree during market downturns, allowing his portfolio to stay invested. The suggested strategy is a direct attack on investment risks, especially, sequence of return risk. Using this strategy, the depreciated assets are allowed to recover their original value and appreciate, ensuring better returns and longevity of investments.

Dilemma: Is reverse mortgage a sustainable retirement plan? How can it be used as a financial planning tool to fund retirement?

With the increasing proportion of elderly population in India (projected to be 19% by 2050), reverse mortgage has emerged as an efficient option to fund retirement days. Seeing its success in foreign countries, the dilemma, is: Is it an adequate solution to fund retirement in India?

Theory: The premise of the present research is based on a coordinated strategy, used by Sacks and Lafaye (2016) where it is proposed that the client, using the line of credit option in reverse mortgage, would borrow only during market downturns, thereby leaving their market investments untouched and maximizing their gains.

Basis of the Case: Phenomena-based case: financial planning for a retiree.

Type of the Case: This is basically an applied decisional case, attempting to determine where reverse mortgage is an effective retirement plan or not.

Protagonist Present: Mr Rajesh Sharma and Mr Anand Malhotra.

Findings: After 20 years into retirement. Mr Rajesh Sharma who does not choose reverse mortgage ends up exhausting his complete investment portfolio value in the 19th year of his retirement life. Thus, he is in financial distress and has no resort to meet his financial needs except to fall back upon his children. On the contrary, Mr Anand Malhotra who opts for the line of credit option in reverse mortgage has positive net worth at the end of 20 years that can ensure a comfortable future for him.

Discussions: The case recommends utilising reverse mortgage as financial planning tool for the elderly.

Mr Rajesh Sharma is in financial distress and has no resort to meet his financial needs except to fall back upon his children. Mr Anand Malhotra by making the smart choice of reverse mortgage, ensured that his portfolio stayed invested longer, providing it sustenance and longevity. By opting for reverse mortgage, Mr Anand Malhotra not only shielded his investments from unnecessary withdrawals, but the option also gave him the confidence to tide over his financial exigencies

The case concludes that reverse mortgage can provide greater probability of the investments/savings to survive the retirement period, coupled with a high probability of greater net worth at the end of the period.

It can be safely concluded that reverse mortgage is definitely a golden walking stick for the elderly. If the government and the lending institutions take cognizance of this aspect of reverse mortgage and market it accordingly, it can turn out to be a vanguard product for the Indian elderly.