How a Reverse Mortgage Mitigates Sequence of Returns Risk: The Research and the Strategy

Sequence of returns risk is the retirement planning problem that most investors don’t think about until it is too late. A portfolio that earns an average of 7% per year over 30 years can produce dramatically different outcomes depending on when the losses occur — and a reverse mortgage line of credit is one of the most effective and underutilized tools for managing that risk.

When I present this strategy to fee-only financial planners and CPAs in San Diego and Scottsdale, the reaction is almost always the same. They’ve heard of reverse mortgages. They’ve recommended against them for clients who didn’t need the money. But they have never seen the coordinated strategy laid out in actual peer-reviewed numbers. The data changes the conversation completely.

This post explains what sequence of returns risk is, how it damages retirement portfolios, what the research actually shows about using a HECM to mitigate it, and how the strategy works in practice for California and Arizona homeowners 55 and older. For a broader income framework, see Retirement Income Strategy.

What is sequence of returns risk?

Sequence of returns risk refers to the danger that experiencing negative investment returns early in retirement — when you are actively drawing down your portfolio — can permanently damage your ability to fund a full retirement, even if average returns over the full period are acceptable.

The math is asymmetrical and brutal. A 30% loss requires a 43% gain just to break even. When you withdraw from a portfolio during a down year, you sell shares at depressed prices — permanently reducing the number of shares that remain available to participate in the subsequent recovery. The portfolio never fully recovers because the shares that would have recovered were sold during the downturn.

Here is the clearest way to understand it: two retirees with identical portfolios, identical withdrawal rates, and identical average returns over 30 years can end up with dramatically different outcomes if the sequence of positive and negative years differs. The retiree who experiences strong early returns and poor late returns typically thrives. The retiree who experiences poor early returns and strong late returns can run out of money years before the other, despite the identical average.

This is not a theoretical concern. Retirees who began drawing down their portfolios in 1973, 2000, or 2008 experienced severe sequence risk. Those who retired in 1983 or 1995 experienced favorable sequences and faced far less pressure. No one controls when they retire relative to market cycles.

The Sacks and Sacks research: what the data actually shows

In 2012 Harold Sacks and Barry Sacks published a peer-reviewed study in the Journal of Financial Planning that directly compared two retirement income strategies across a 30-year period using actual historical market returns. The study is the definitive academic foundation for using a HECM reverse mortgage as a portfolio volatility tool.

The research compared two approaches — one treating the HECM as a last resort, and one using a coordinated strategy — across identical starting conditions. Here is exactly what the study used and what it found:

The difference between these two outcomes — $0 versus $1,021,282 at the end of retirement — was produced using identical starting assets, identical income needs, identical inflation assumptions, and identical actual market returns. The only variable was the sequence in which income sources were used.

This is the number I show every financial planner I meet with. One million dollars. Same portfolio. Same home. Same returns. Different strategy.

Why 1973–2002 was the right period to test

The researchers chose this 30-year window deliberately. It begins with the 1973–1974 bear market — one of the worst in modern history — and includes the 2000–2002 tech crash. Testing the strategy against this period is stress-testing it against the worst sequence of returns most living retirees have ever experienced. If the coordinated strategy outperforms under these conditions, its advantage under more typical market sequences is even larger.

Why the coordinated strategy works: the three mechanics

The coordinated strategy is not financial magic. It works because of three specific, well-understood financial dynamics operating in concert:

Mechanic 1: Avoiding forced selling at depressed prices

When a retiree draws income from a portfolio during a down market year, they are selling shares at precisely the worst moment — when prices are lowest. By switching to the HECM as the income source in any year following a negative portfolio return, the coordinated strategy eliminates this forced selling entirely. The portfolio sits untouched during the downturn, preserving every remaining share to participate in the recovery.

The mathematical impact is significant. If a portfolio drops 25% and the retiree needs to withdraw $40,000 for living expenses, they must sell a larger number of shares at the depressed price. Those shares are gone permanently. When the market recovers 35%, the recovery applies to a smaller share count than if the withdrawal had been avoided. The HECM draws prevent this compounding damage.

Mechanic 2: The HECM line of credit grows independently of markets

The unused portion of a HECM line of credit grows at the loan’s interest rate, compounded monthly, regardless of what stock or bond markets do. This growth is contractually guaranteed. It is not correlated with equity returns, bond yields, or any market index. For mechanics, read How the Line of Credit Works.

This means that in years when the portfolio is declining, the HECM line of credit is growing. The buffer asset becomes larger precisely when it is most needed. This inverse relationship — though not formally engineered as a hedge — functions as one in practice, providing a larger income source available at the moments when the portfolio is most stressed.

Mechanic 3: The strategy requires very few switches

A common misconception about the coordinated strategy is that it requires constant switching between the portfolio and the HECM. In practice, across a 30-year retirement, the strategy may require switching to the HECM income source in only 5 to 8 years out of 30 — specifically those years following negative portfolio returns. The rest of the time the portfolio draws as normal.

In the Sacks and Sacks research, the total additional HECM draws from the coordinated strategy versus the last resort strategy were only $40,506 more over 30 years ($563,526 versus $523,020). The additional cost was modest. The additional outcome was over one million dollars. The ratio of incremental cost to incremental benefit is extraordinary.

How to implement the coordinated strategy

The coordinated strategy is straightforward in concept and requires disciplined execution in practice. Here is exactly how it works:

The rule is simple enough to follow without sophisticated financial modeling: look at what the portfolio did last year. If it was positive, draw from the portfolio this year. If it was negative, draw from the HECM this year. Repeat for the life of retirement.

In practice this works best when both the homeowner and their financial advisor are aligned on the strategy before retirement begins, with the HECM line of credit already established and the switching rule agreed upon in advance. Depending on how draws are structured, FHA’s first-year disbursement rules may still apply — see What Is the 60% Rule on a Reverse Mortgage?.

The HECM line of credit growth feature: why it must be established early

The coordinated strategy is most powerful when the HECM line of credit is established at or near the beginning of retirement — not when the portfolio is already stressed. This is the single most important timing insight for homeowners considering this strategy.

Three additional HECM strategies for retirement income planning

The coordinated strategy is the most research-validated approach to using a HECM for portfolio protection, but it is not the only evidence-based strategy. Three others are worth understanding:

Strategy 1: Social Security deferral bridge

Every year a retiree delays claiming Social Security past their full retirement age increases their eventual benefit by approximately 6 to 8 percent per year, up to age 70. For a retiree eligible for $2,000 per month at full retirement age, waiting until 70 produces approximately $2,640 per month — a permanent 32% increase that is inflation-adjusted for life.

Using the HECM line of credit to fund living expenses during the deferral years — rather than drawing down the investment portfolio — allows the retiree to capture the maximum Social Security benefit without prematurely depleting their portfolio. HECM proceeds are not counted as income by the Social Security Administration and do not affect benefit calculations. See also: Does It Affect Social Security

Strategy 2: RMD deferral

Drawing from the HECM line of credit from age 62 through the onset of Required Minimum Distributions at age 73 allows the retirement account to grow uninterrupted for up to 11 years. The compounding on an untouched portfolio during that period can produce significantly higher balances at 73 than a portfolio that was drawn on throughout those years.

When RMDs eventually exceed living expenses, the excess can be directed back into the HECM line of credit, partially rebuilding the available balance for future use. This strategy works particularly well for homeowners with significant IRA or 401(k) balances who want to maximize tax-deferred growth before mandatory withdrawals begin.

Strategy 3: Tax-efficient Roth conversion bridge

In lower-income years early in retirement — before Social Security and RMDs are in full effect — drawing from the HECM rather than the investment portfolio keeps taxable income low. This creates an opportunity to convert traditional IRA funds to a Roth IRA at lower tax rates during those years, building a tax-free asset that benefits heirs and reduces future RMD burden. This strategy should be coordinated with a CPA or financial planner familiar with retirement tax planning.

Who this strategy is most relevant for

The coordinated HECM strategy is not appropriate for every homeowner. It is most relevant for a specific profile:

For the right household, however — which describes a significant portion of the San Diego, Scottsdale, and Phoenix markets where home values are high and homeowners have spent decades accumulating both equity and retirement savings — the coordinated strategy is among the most powerful retirement income planning tools available.

Working with your financial advisor on this strategy

The coordinated strategy works best when the homeowner’s CRMP and financial advisor work together. The CRMP manages the HECM side — originating the loan, structuring the line of credit, and being available when draws are needed. The financial advisor manages the portfolio side — determining when the prior year’s return was negative and communicating when to switch income sources.

If your financial advisor is not familiar with the coordinated HECM strategy, the Sacks and Sacks 2012 Journal of Financial Planning paper is the starting point for the conversation. Jay is available to present the strategy directly to financial advisors and their clients — at no charge — as part of the education he provides to referral partners across California and Arizona.

For advisors interested in the research: the full citation is Sacks, H.H. and Sacks, B.E. (2012). “Reversing the Conventional Wisdom: Using Home Equity to Supplement Retirement Income.” Journal of Financial Planning, February 2012.

Frequently asked questions

What is sequence of returns risk in retirement?

Sequence of returns risk is the danger that experiencing negative investment returns early in retirement can permanently damage a portfolio even if average returns over the full period are acceptable. When you withdraw from a portfolio during a down year you sell shares at depressed prices permanently reducing the shares available to participate in recovery.

What did the Sacks and Sacks research show about reverse mortgages?

Sacks and Sacks published peer-reviewed research in the Journal of Financial Planning in 2012 showing that coordinating HECM reverse mortgage line of credit draws with portfolio withdrawals — switching to the HECM during down market years — produced $1,021,282 in final portfolio value compared to $0 when treating the reverse mortgage as a last resort. Both scenarios used identical starting assets and actual 1973-2002 market returns.

How does the coordinated HECM strategy work in practice?

The rule is simple: look at what the portfolio did last year. If it was positive draw income from the portfolio this year. If it was negative draw income from the HECM line of credit this year. This prevents forced selling at depressed prices and allows the full market recovery to benefit the remaining portfolio balance. Over a 30-year retirement this typically requires switching to the HECM in only 5 to 8 years out of 30.

Does the coordinated strategy affect Social Security or Medicare?

No. HECM line of credit draws are loan proceeds and are not counted as income by the IRS, Social Security Administration, or Medicare. They do not affect adjusted gross income, Medicare premium calculations, or Social Security benefit amounts. For more context, see Does It Affect Social Security

When is the best time to establish a HECM line of credit for this strategy?

The strategy is most powerful when the HECM line of credit is established at or near the beginning of retirement. The unused portion of a HECM line of credit grows at the loan interest rate compounded monthly regardless of home value changes. A $300,000 line of credit at 7% grows to approximately $590,000 in 10 years if unused — creating a substantially larger buffer when needed most.

The bottom line

Sequence of returns risk is the most dangerous threat to a retirement portfolio that most retirees have never heard of by name. The coordinated HECM strategy — validated by peer-reviewed research and consistent with subsequent academic work — addresses it directly by providing a non-correlated, growing income buffer that protects the portfolio at its most vulnerable moments.

The difference between treating a reverse mortgage as a last resort and integrating it as a coordinated component of a retirement income plan is, according to the research, over one million dollars in final portfolio value. Not from superior market returns. Not from higher savings rates. From a different strategy applied to the same assets in the same market environment.

For California and Arizona homeowners 62 and older with both a meaningful investment portfolio and significant home equity — the coordinated HECM strategy is among the most impactful retirement income conversations available. It is worth having with both a licensed CRMP and your financial advisor before retirement begins, not after the first market downturn.

Related reading: How the Line of Credit Works · Does It Affect Social Security · Retirement Income Strategy

About the author

Jay Zayer is a Certified Reverse Mortgage Professional (CRMP) and Certified Housing Wealth Advisor with over 15 years of experience serving homeowners 55+ throughout California and Arizona. Jay regularly presents the coordinated HECM strategy to fee-only financial planners, CPAs, and RIAs across San Diego and the Phoenix metro area. CA DRE #01456165, #01450361 · NMLS #307713 · AZ #1022722.

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The research referenced in this post (Sacks and Sacks, 2012, Journal of Financial Planning) is used for educational purposes. Past market performance does not reflect future performance. All illustrations are for educational purposes only. This material is not from HUD or FHA. All reverse mortgage loans are subject to credit and property approval. This content does not constitute financial, investment, or tax advice. Consult qualified advisors regarding your specific retirement plan. CA DRE #01456165, #01450361 · NMLS #307713 · AZ #1022722.