Buffer Accounts for Retirement Longevity

With the markets making new highs daily there is not much to worry about when contemplating retirement planning. Set it and forget is the mentality taking root in investor’s minds as the markets are pricing in the Trump agenda of tax cuts, infrastructure spending and health care reform. We have seen this before, like a calm summer’s day with the sun shining and the winds calm. This is a great time to be an investor with money. The upcoming generation may not have it so good as some time in the future debt will have to be dealt with, but the future be damned right now.

Should storm clouds ever start to build on the horizon, the use of buffer accounts can be a valuable tool for investors, especially middle class retirees, to use in the event they do not want to further deplete their retirement when things are not so rosy and markets are retreating. What are buffer accounts? Well, they may be simply cash on the sidelines in a savings or brokerage account, property owned other than one’s principal residence, an income annuity that pays a monthly income for the balance of an investor’s life or gold stored away. Another often overlooked option that is gaining popularity is the use of a home equity line of credit through a reverse mortgage. Reverse mortgages have had a bad name for years as the outrageous upfront costs made them untenable to most investors. Even today you can get a really bad deal on a reverse mortgage by watching television and following the advice of Tom Selleck or Henry Winkler. There are alternatives available, although they may be harder to find, offering a reasonable mortgage origination fee and the best time to originate a reverse mortgage is when interest rates are low and an investor is close to age 62, the age when reverse mortgages are available. What makes this a good choice for retirees is that with a line of credit reverse mortgage the balance available will grow over time if it is not used and an investor can use this line of credit as a source of monthly income should the markets drop and taking money out of a retirement plan is not an appealing option. The use of the line credit gives an investor time to wait out a bad market cycle thereby extending the life of a retirement account by many years. Another good feature of using a reverse mortgage line of credit as a buffer account vs an income annuity is that you do not need to come up with a large upfront investment, as you do with an annuity, thereby allowing you to keep your cash liquid. Income annuities also have the issue of locking in your funds for life thereby limiting your ability to leave a legacy to your family.

Now is a good time to think about buffer accounts as this market may be discounting potential gains far into the future. It is not uncommon for markets to take years to digest gains as corrections do not always come quickly as they did in 2008/09. A slow drip of a correction is much more painful as the end seems like it is never in sight. Think buffer to ease the suffer.