How a Reverse Mortgage Can Help Mitigate Portfolio Volatility in Retirement

One of the most significant and least discussed risks in retirement is sequence of returns risk—the danger that a market downturn in the early years of retirement can permanently damage a portfolio, even if markets recover strongly afterward.

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.

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.

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.

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.

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 15+ 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 15+ years of experience helping homeowners 55+ in California and Arizona. CA DRE #01456165, #01450361 · NMLS #307713 · Arizona #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.