Reverse In Real Life 4/5

Case Study 4: David and Laura (High Net Worth)

Details:

· Ages:?David (74) and Laura (73)

· Home Value:?$5M

· Investments:?$2M in taxable accounts, $300K in non-taxable accounts

Goals:

· Protect investments by maintaining liquidity during market downturns and avoiding forced withdrawals from income-producing investments.

· Enhance lifestyle by increasing cash flow for discretionary expenses like travel, philanthropy, and gifting.

· Optimize taxes by reducing reliance on taxable investment withdrawals and avoiding unnecessary taxes.

· Preserve legacy by ensuring a substantial inheritance through estate planning and life insurance.

· Plan for aging costs by funding nine years of in-home care for David ($15K/month) without depleting income-producing investments and ensuring Laura’s financial security after his passing.

Updated Strategy:

1. Reverse Mortgage Line of Credit ($2.1M):

· Secure a line of credit of $2.1M, growing at 1.5% annually on remaining balance, available for 10 years (jumbo reverse program).

· Use the line to cover David’s in-home care costs ($180K/year for nine years) and annual life insurance premiums ($40K/year).

· Expert Insight (Kitces):?Reduces sequence-of-returns risk and aligns with dynamic withdrawal strategies.

2. Life Insurance:

· Dedicate $40K/year from the line of credit for a permanent life insurance policy, guaranteeing a $1.5M tax-free death benefit.

· Expert Insight (Sacks):?Enhances legacy planning with tax-efficient strategies.

3. Healthcare Contingencies:

· Fund David’s in-home care costs of $180K/year for nine years entirely through the line of credit.

· Reserve $50K as a contingency for unexpected healthcare needs for Laura, ensuring her financial stability after David’s passing.

· Expert Insight (Pfau):?Proactively allocating resources ensures financial stability and reduces stress.

4. Tax Planning Refinements:

· Use the line of credit to cover taxes on Roth conversions to reduce RMDs and maintain lower tax brackets in the future.

· Coordinate taxable withdrawals to minimize tax liabilities over time while preserving portfolio longevity.

· Expert Insight (Sacks):?Strategic tax planning aligns with efficient retirement income strategies.

5. Post-Passing Security for Laura:

· Reinvest $1.5M life insurance proceeds into a diversified portfolio to generate sustainable income.

· Suggest downsizing the home after David’s passing to free up additional equity for Laura’s use (~$2M).

· Reserve $200K from investments for assisted living or healthcare needs in later years.

· Expert Insight (Pfau):?Downsizing can reduce housing costs and free up additional liquid assets.

Timeline of Benefits

Age 73

Open reverse mortgage line of credit ($2.1M). Withdraw $180K/year for care and $40K/year for insurance. HECM Balance at $2,100,000. Investments remain untouched, continuing to grow.

Age 78

Credit line grows to ~$850K due to withdrawals. Withdrawals total $1.1M for care and insurance. HECM Balance at ~$850,000. Investments grow ~$200K higher compared to no reverse mortgage.

Age 82

David passes away; in-home care costs cease. HECM Balance at ~$500,000. Total care costs over nine years: $1.62M (covered entirely by the line of credit).

Age 83

Jumbo reverse mortgage credit line becomes unavailable. Remaining investments (~$2.4M) and life insurance proceeds ($1.5M) serve as Laura’s financial safety net.

Age 88

Laura uses a sustainable 3.5% withdrawal rate from investments. Portfolio longevity is preserved; and her financial legacy ensured.

Summary of Results:

Portfolio Preservation:

· Avoided $1.62M in forced investment withdrawals for care costs and insurance.

· Investments grow ~$500K higher over 15 years compared to a no-reverse-mortgage scenario.

Tax Savings:

· Reduced taxable withdrawals save ~$450K in capital gains and income taxes.

· Roth conversions funded via credit line lower future RMDs, reducing long-term tax burdens.

Enhanced Legacy:

· Life insurance ensures a guaranteed $1.5M inheritance, unaffected by market fluctuations.

· Tax-advantaged gifting reduces estate tax liabilities and strengthens the legacy.

Post-Passing Security:

· Laura has ~$2.4M in investments and access to life insurance reserves after year 10, ensuring financial security.

· Downsizing the home can free up an additional ~$2M for Laura’s liquidity or investment needs.

David and Laura’s story highlights how a carefully planned reverse mortgage can enhance financial security, flexibility, and peace of mind for ultra-high-net-worth individuals. By using a $2.1M reverse mortgage line of credit, they avoided $1.62M in forced investment withdrawals, funded nine years of in-home care, and secured a $1.5M life insurance policy to protect their legacy. This strategy allowed their investments to grow by an additional $500K, minimized taxes by ~$450K through reduced taxable withdrawals and Roth conversions, and ensured financial stability for Laura after David’s passing.

The reverse mortgage provided the flexibility to enjoy their retirement without financial strain—whether for managing care costs, optimizing taxes, or supporting their philanthropic goals. For Laura, this plan brought lasting peace of mind, knowing she would remain financially secure with ~$2.4M in investments, life insurance proceeds, and the option to downsize if needed.

This case demonstrates how reverse mortgages, combined with expert guidance, can create a dynamic, flexible strategy to support a fulfilling retirement and lasting legacy.