How a Reverse Mortgage Can Help Mitigate Portfolio Volatility in Retirement

According to CFPB, reverse mortgages are specialized home-secured loans, and borrowers should evaluate program rules and long-term obligations before deciding how to use home equity.

Most retirement income strategies address this risk by diversifying investments or adjusting withdrawal rates. But there is a third option that many financial advisors have begun incorporating into comprehensive retirement plans: using home equity— specifically a HECM reverse mortgage line of credit—as a strategic buffer against portfolio volatility.

The data behind this strategy is compelling. Peer-reviewed research published in the Journal of Financial Planning by Sacks and Sacks (2012) demonstrated that coordinating HECM line of credit draws with investment portfolio withdrawals based on market performance can dramatically improve retirement outcomes—in some scenarios turning a depleted portfolio into one that survives with over $1 million intact.

This post explains what sequence of returns risk is, how a reverse mortgage line of credit addresses it, and what the research actually shows in plain numbers.

This presentation was created for financial advisors. If you're a homeowner, it's a great one to share with yours.

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Read the full video transcript

Introduction

Hi, I'm Jay Zayer, a Certified Reverse Mortgage Professional and Certified Housing Wealth Advisor. In the next few minutes, I want to walk you through one planning problem every retirement income advisor deals with: sequence of returns risk. And I want to show you a peer-reviewed way to buffer it, using an asset that sits completely outside your client's portfolio: their home equity. This isn't about replacing anything you do. It's about giving you one more tool.

Sequence-of-returns risk

You know this risk well. Two clients can earn the same average return over thirty years and end up in completely different places. The difference is timing. Losses early in retirement force withdrawals at depressed prices, and those shares never get to take part in the recovery. Clients who retired in 1973, 2000, or 2008 felt this. Those who retired in 1983 or 1995 largely didn't. And none of them got to choose. The usual tools are diversification and lower withdrawal rates. What most plans are missing is a reserve the client can draw from instead of the portfolio when markets are down.

Here's why it matters so much. A thirty percent decline requires a forty-three percent gain just to get back to even. And every dollar withdrawn during the drawdown raises that bar even further. The simplest fix is to not sell during those years. But the client still needs income. So the question becomes: where does that income come from, if not the portfolio?

Home equity: the missing piece of the plan

Most retirement plans are built from three pieces: investments, insurance, and fixed income, like Social Security and pensions. But for many clients, the largest asset on the balance sheet, their home, isn't part of the plan at all. Or it's treated as a last resort. The FHA-insured Home Equity Conversion Mortgage, or HECM, brings that asset into the plan, without the client selling the home or taking on a required monthly mortgage payment.

How a HECM line of credit works

A HECM line of credit has four characteristics that make it a strong buffer. First, it's uncorrelated with markets. Its value doesn't move with stocks or bonds. Second, the unused line grows over time, at the loan's rate plus the annual mortgage insurance premium. And unlike a home equity line of credit, it can't be frozen or reduced as long as the borrower meets the loan terms. Third, draws are loan proceeds, not income. They don't raise modified adjusted gross income, so they don't trigger Medicare premium surcharges or increase the taxation of Social Security. And fourth, there's no required monthly mortgage payment. The borrower keeps title, and continues to pay property taxes, insurance, and maintenance.

The research: a 1973–2002 stress test

So what does the research show? This illustration from Finance of America Reverse is based on the work of Sacks and Sacks, published in the Journal of Financial Planning. It follows a sixty-two-year-old with a four hundred thousand dollar portfolio in a sixty-forty mix, twenty-seven thousand dollars a year in Social Security, and a first-year portfolio draw of twenty-six thousand dollars, rising three and a half percent a year for inflation. The returns aren't averages. They're the actual sixty-forty returns from 1973 through 2002. That window opens with the 1973 bear market and includes the tech crash. It's a deliberate stress test.

The client and the markets are identical in both scenarios. Only one thing changes: the rule for where each year's income comes from. In the first scenario, the HECM is a last resort. The client draws from the portfolio every year, and only taps the line once the portfolio is gone. In the second, the coordinated strategy, any year that follows a negative portfolio return is funded from the HECM instead. Once the portfolio recovers, draws go back to the portfolio.

Results: $0 vs. $1,021,283

Here's the result after thirty years. Using the HECM as a last resort, the portfolio ran out at age eighty-six. Using the coordinated strategy, the client was still fully funded at ninety-one, with just over one million dollars remaining in the portfolio, and HECM credit still available. Now look at total HECM usage, including interest: about five hundred twenty-three thousand dollars in the first case, and about five hundred sixty-four thousand in the second. Roughly forty thousand dollars more in borrowing produced a completely different retirement. And because the loan is non-recourse, the client and their heirs never owe more than the home is worth.

Year-by-year breakdown

Here's how it played out, year by year. The 1973 and 1974 losses hit both portfolios right away. But in the coordinated strategy, income at ages sixty-three and sixty-four came from the HECM, so nothing was sold at the bottom. By age sixty-four, that portfolio was already about sixty-six thousand dollars ahead. The next switch didn't come until age eighty, and the last one at ninety-one. Just four years out of thirty. Meanwhile, the last-resort portfolio never recovered from that early hit. It hovered around three hundred thousand dollars while inflation-adjusted draws kept rising, and it ran out at eighty-six.

Same assets. Same markets. Same spending. The only thing that changed was the order of withdrawals. This strategy doesn't require a better portfolio, a lower withdrawal rate, or a cut in lifestyle. It requires a second, uncorrelated source of funds, and a clear rule for when to use it.

Why the coordinated strategy works

Three things make it work. First, the client avoids selling at the bottom, so shares stay invested for the full recovery. Second, the reserve grows on its own. The unused line of credit compounds independently of the markets, so the buffer is larger later in retirement. And third, it's used sparingly. In this illustration, the HECM funded income in just four of thirty years. You stay in charge of the portfolio. The HECM is simply a targeted buffer for its most vulnerable moments.

Social Security bridge and deferring IRA draws

The line of credit has other planning uses, too. One is a Social Security bridge. Benefits grow eight percent for each year a client delays past full retirement age, up to age seventy. Funding those years from the HECM means a client entitled to two thousand dollars a month at sixty-seven can lock in about two thousand four hundred eighty dollars at seventy, for life. Another is deferring retirement account draws. In an illustration using actual returns from 1983 through 2012, the HECM covered expenses early, account draws began later, and excess required minimum distributions were used to repay the line. At ninety-three, the client had about seven hundred seventy thousand dollars left in the account, and more than four hundred fifteen thousand dollars in available credit.

Which clients are a fit

This strategy isn't for everyone. Strong candidates are sixty-two or older, with significant home equity and a meaningful portfolio exposed to sequence risk. They plan to stay in the home long term, and they want income that lasts. It's not a fit for clients likely to move within a few years, clients who can't keep up with taxes, insurance, and maintenance, or clients with little equity. And for clients with mostly home equity and very little portfolio, a different HECM strategy usually makes more sense. I'll always tell you honestly when a client isn't a fit.

Costs and considerations

There are real costs to weigh. Upfront, there's a two percent FHA mortgage insurance premium, plus third-party closing costs. I typically charge no origination fee. Because of that upfront cost, the strategy works best over a long holding period. Interest and an annual half-percent mortgage insurance premium accrue only on amounts actually drawn. The client must live in the home as a primary residence and keep taxes, insurance, and maintenance current. It also takes discipline. The draw rule should be set in advance. Finally, the research used HECM terms from 2012 and one historical period. Today's numbers are different, so I model every client with current figures.

How advisors and HECM specialists work together

Here's how we'd work together. You own the portfolio. You identify candidates, set the draw rule, and decide each year which source funds income. I structure the HECM. I model the client's line of credit with current numbers, explain the costs and obligations, and manage the loan through closing. Together, we meet with the client up front, then review the draw rule once a year. Your client never loses their advisor relationship. And because the portfolio is preserved rather than drained, the assets you manage are protected too.

Next steps

If you have one or two clients in mind, send them my way. I'll prepare a side-by-side showing their actual available line of credit, current costs, and how it would coordinate with their portfolio. No obligation, and I'll tell you honestly if it's not a fit. You can reach me at 760-271-8646, or by email at Jay@ReverseMortgage.Coach. This video is educational only, and is not investment or tax advice. The illustrations are based on historical data and don't predict future results. This material is not from HUD or FHA, and has not been approved by HUD or any government agency. Thanks for watching.

What is sequence of returns risk?

Sequence of returns risk refers to the specific danger of experiencing negative investment returns in the early years of retirement, when portfolio withdrawals are beginning and the damage from losses is most difficult to recover from.

Here is why timing matters so much. If a retiree earns an average of 7% per year over a 30-year retirement, the final portfolio balance looks very different depending on whether the strong years come early or late. Early losses force the retiree to sell more shares at depressed prices to cover living expenses, permanently reducing the number of shares available to benefit from the eventual recovery.

This is not a theoretical concern. Retirees who began drawing down their portfolios in 1973, 2000, or 2008 faced severe sequence of returns risk. Those who retired in 1983 or 1995 benefited from early strong returns and faced far less pressure on their portfolios.

The problem is that no one can control or predict when they will retire relative to market cycles. This is precisely why a non-correlated buffer asset—one that is not affected by stock and bond market performance—is so valuable in a retirement income plan.

In my experience working with homeowners in San Diego and Scottsdale, I see this come up constantly in consultations right after a rough quarter. A Scottsdale couple I advised had paused $3,900 monthly portfolio withdrawals for eight months by using planned home-equity liquidity instead, which let their investment accounts recover before they resumed draws. Their exact reaction was that having a backup income rail turned market fear into a manageable planning decision.

Home equity as the fourth component of retirement income

Traditional retirement planning often focuses on three income sources: Social Security, pension income, and investment portfolio withdrawals. Financial planners and advisors have increasingly recognized that for homeowners with significant equity, home equity represents a fourth potential income source that has been largely ignored.

Home equity is typically the largest single asset on a retiree's balance sheet—particularly in California, where median home values have long been high in major markets including San Diego, Los Angeles, and the Bay Area. Yet many retirement income plans treat that equity as either a last resort or simply irrelevant.

According to AARP research, most older adults say they want to remain in their homes as they age, which is why integrating housing wealth into retirement cash-flow planning is increasingly practical.

The HECM reverse mortgage line of credit offers a way to make that equity an active, productive part of a retirement income strategy—without selling the home, without a required monthly principal-and-interest payment, and without disrupting the lifestyle the homeowner has built (borrower must still pay property charges, maintain the home, and meet loan terms).

When integrated proactively with an investment portfolio rather than used reactively as a last resort, the research shows it can transform retirement outcomes.

The two strategies: what the research actually shows

The Sacks and Sacks (2012) research compared two approaches to retirement income planning using identical starting assumptions across a 30-year retirement period. Here are the parameters used in the study:

The investment returns used were actual historical performance data from a 60/40 portfolio across 1973 to 2002—one of the most challenging retirement windows in modern history, beginning with the 1973–1974 bear market and including the 2000–2001 tech crash. This deliberately stress-tests the strategy under adverse conditions.

Illustration 1: HECM as a last-resort strategy

In the first scenario, the retiree draws all income from their investment portfolio first, throughout retirement, and only turns to the HECM line of credit when the portfolio is completely exhausted. This reflects the approach many retirees take when they have a reverse mortgage but treat it as an emergency fund rather than an integrated income tool.

The result using actual historical returns from 1973–2002 was stark: the portfolio was exhausted at year 24.2—nearly six years before the end of the assumed 30-year retirement. The retiree ran out of investment income at age 86 and was forced to rely entirely on the HECM line of credit and Social Security for the remaining years. Total draws on the HECM line of credit by the end of the period totaled $523,020 including accumulated interest. Portfolio balance at year 30: $0.00.

Illustration 2: The HECM portfolio longevity strategy (coordinated strategy)

In the second scenario, the retiree uses the exact same starting assets, income needs, inflation assumptions, and market returns. The only difference is how the HECM line of credit is used. Instead of waiting for the portfolio to run out, the retiree switches to the HECM as their income source for any year following a down market year. When the portfolio recovers, they return to drawing from the portfolio. The HECM acts as a buffer—absorbing the income need during recovery years without forcing asset sales at depressed prices.

The result was dramatically different. The portfolio not only survived the full 30 years—it grew. The retiree ended the period with $1,021,282.65 remaining in their investment portfolio, plus additional HECM line of credit availability. Total HECM draws were slightly higher at $563,526, but the outcome was incomparably better.

Side-by-side comparison: $0 vs. $1,021,282

The difference between these two outcomes is not about how much money the retiree started with, how the market performed, or how much income they needed. It is about the sequence in which they drew from their two available income sources. The coordinated strategy—using the HECM during down years to protect the portfolio—produced over one million dollars more in final portfolio value in this published illustration.

Why does this work? The mechanics explained

The coordinated HECM strategy works because of three dynamics working together:

1. Compounding is asymmetrical

A 30% loss requires a 43% gain just to break even. When you withdraw from a portfolio during a down year, you are selling shares at depressed prices, which means you need even larger gains in subsequent years to recover. By switching to the HECM during down years, you avoid selling shares at the worst time and allow the full recovery to benefit the remaining portfolio balance.

2. The HECM line of credit grows on its own terms

The unused portion of a HECM line of credit can grow over time per the loan terms and rate environment—not based on the stock or bond markets. For many borrowers, the available line in later years can be larger than in year one, even before draws. (Growth features, costs, and availability depend on the specific loan; your closing documents and counselor explain what applies to you.)

3. The strategy can require only a few switches

In the Sacks and Sacks research, the coordinated strategy only required switching to the HECM income source in years following a negative portfolio return. In a typical 30-year retirement, that might mean a limited number of HECM-focused years out of 30—not a wholesale shift to reverse mortgage income, but a targeted buffer that protects the portfolio during vulnerable moments.

Three HECM retirement strategies for California homeowners

The portfolio-volatility mitigation strategy is one of several ways a HECM can be integrated into a comprehensive retirement income plan. Here are three approaches that are well-suited to many California and Arizona homeowners 55+:

Strategy 1: The coordinated strategy (as described above)

Establish a HECM line of credit at or near retirement. Draw from the investment portfolio in positive market years. Switch to the HECM in years following market declines. Return to the portfolio when markets recover. This is the strategy highlighted in the Sacks and Sacks research and can improve portfolio longevity when applied consistently and with professional coordination.

Strategy 2: Defer Social Security using the HECM

Every year you delay claiming Social Security past your full retirement age can increase your eventual benefit by roughly 6% to 8%, up to age 70. For a retiree who would receive $2,000 per month at 66, waiting until 70 could mean $2,640 per month—a meaningful increase that is adjusted for inflation for life.

Using a HECM line of credit to fund living expenses during the delay years can help you capture a higher Social Security benefit without drawing down the investment portfolio prematurely. Loan draws are not earned income. Once the higher Social Security payment begins, HECM draws used for the bridge can often be reduced or stopped, subject to your plan and needs.

For how Social Security fits with reverse mortgages more broadly, see: Does a reverse mortgage affect Social Security?.

Strategy 3: Defer retirement account draws until required minimum distributions

A related planning idea: using HECM proceeds to cover living expenses from age 62 through the point where required minimum distributions begin (RMD ages have changed over time; confirm the current rules with your tax advisor). That can allow tax-deferred accounts to compound longer, subject to your tax situation. The "Presenting to Financial Planners" line of research has illustrated this using historical data; your advisor should model it with your balances and tax profile.

In one illustrated path using market data from 1983 to 2012, a HECM line of credit covered living expenses through age 68 (six years of pre-RMD portfolio growth), with retirement account draws then beginning at 69. When RMDs later exceeded living expenses, excess cash flow was used to pay down and rebuild the HECM line. The published illustration ended with about $770,000 remaining in the retirement account at age 93 and more than $415,000 still available in the HECM line. Your results will differ.

What this means specifically for California homeowners

California homeowners are often well-positioned to benefit from these ideas for two reasons:

Higher home values, larger available lines (all else equal). A homeowner in a high-value market can have more principal limit to work with than a retiree in a lower-value market, which can matter when the line is a voluntary buffer in bad market years.

Proprietary options from age 55. California offers proprietary reverse mortgage programs that can begin at 55—earlier than the HECM minimum age of 62—potentially giving coordinated strategies more time to be established and grown before draws are needed. (Product availability and terms vary; not everyone will qualify for every program.)

Important considerations before pursuing this strategy

The research supporting a coordinated HECM strategy is peer-reviewed and thought-provoking. Practical planning still requires a clear-eyed list of tradeoffs, discussed with both a HECM specialist and your financial or tax advisor:

• Discipline and rules. Switching income sources based on market performance takes planning and consistency. It works best when you set clear rules in advance, rather than making emotional decisions year by year.
• HECM closing costs are real. On many California homes, origination, FHA MIP, and other costs can be meaningful— often in a range of roughly $8,000 to $15,000+ depending on the file (not a quote). Weigh those costs against the long-term expected benefit, especially if the line is established early and held for many years.
• Primary residence and moving. The HECM must fit your housing plan. If you sell or no longer use the home as your primary residence per the loan terms, the loan may become due and payable. The coordinated strategy is often best for homeowners who intend to stay long term.
• This is retirement income planning, not investment advice. The research is documented, but every individual situation is different. Implementation should be designed with your financial advisor and HECM specialist together—Jay does not provide investment or tax advice.

Working with your financial advisor

If your financial advisor is not familiar with the HECM coordinated strategy, share this post and the Sacks and Sacks (2012) Journal of Financial Planning research. The idea is increasingly discussed in comprehensive retirement plans by professionals who work with homeowners 55+. Jay is available to present this research to financial advisors and their clients: 760-271-8646 or Jay@ReverseMortgage.Coach.

According to HUD, every HECM borrower must complete independent, HUD-approved counseling before closing, which is one of the core consumer safeguards in the program.

Frequently asked questions

Does my financial advisor need to be involved in setting up a HECM?

Not as a matter of law—but for the coordinated strategy, coordination helps. Your advisor can help frame portfolio "up" and "down" years; Jay handles reverse mortgage structure and program rules. When both work together, the transitions are usually clearer.

Does the HECM line of credit affect my investment portfolio or tax situation?

A HECM line of credit is a loan. Draws are generally not taxable income. That is a major reason a coordinated strategy can work—you may avoid selling appreciated securities in a down year. You should still review tax, Medicare, and benefits with your tax advisor, because your full picture (other income, deductions, state rules) matters.

What if the HECM line of credit is exhausted during retirement?

If the line is fully drawn, you typically return to your other plan—often portfolio draws and Social Security, subject to what still works for your budget. The HECM in this model is a supplement and buffer, not a full replacement for your portfolio in every design.

Is the coordinated strategy appropriate for everyone?

It is most natural for homeowners who have both a meaningful investment portfolio and significant home equity, who plan to stay in the home, and who care about sustainable lifetime income. If the portfolio is small and home equity is the main asset, a different payout strategy (for example, tenure or term payments) may be a better focus—ask a specialist.

The bottom line

A reverse mortgage line of credit can be a proactive part of a retirement income plan that treats home equity as more than a last resort—coordinated with portfolio draw rules like those studied by Sacks and Sacks. For many California and Arizona homeowners 55+ with both equity and invested assets, the coordinated approach deserves a serious, numbers-based conversation.

The strategy does not require giving up your home or a required monthly payment in the HECM sense, but you must follow all loan terms (taxes, insurance, maintenance, occupancy, etc.). It can mean establishing a HECM line of credit and using it strategically in years when protecting the portfolio matters most. Explore your line with the free reverse mortgage calculator and our guide: How the reverse mortgage line of credit works. To talk through your situation, request a strategy call.

Want to see how a HECM could support your retirement portfolio?

Jay Zayer, CRMP has spent 18 years helping California and Arizona homeowners 55+ use home equity in coordinated retirement plans—no pressure, no obligation.

About the author

Jay Zayer is a Certified Reverse Mortgage Professional (CRMP) and Certified Housing Wealth Advisor with 18 years of experience helping homeowners 55+ in California and Arizona. CA DRE #01456165, #01450361 · NMLS #307713 · Arizona AZ #1022722. More on the About page.

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This material is not from HUD or FHA and has not been approved by HUD or any government agency. All reverse mortgage loans are subject to credit and property approval. Illustrations are based in part on Sacks and Sacks (2012), Journal of Financial Planning, and are for education only. Past market performance is not a guarantee of future results. This is not financial, investment, or tax advice. Consult a financial advisor, tax advisor, and a licensed HECM specialist. Jay Zayer does not make investment recommendations. NMLS #307713.