Financial Planning for a Retired Couple: Reverse Mortgage as a Strategic Option

The case study discusses the financial challenges faced by a retired couple and their objective to get a lump sum amount of $250,000 along with a monthly annuity of $3,500. The report evaluates two strategic options available to them, selling their house or opting for a reverse mortgage. After analyzing the pros and cons of both options, the report recommends reverse mortgage as the best option for the couple.

GROUP CASE

Table of Contents
INTRODUCTION...........................................................................................................................3
Identification of client’s current situation, financial constraints / capacity and objectives.........3
ISSUES & OPPORTUNITIES........................................................................................................3
Current financial challenge & needs of the client, analysis of each strategic option..................3
Recommendations............................................................................................................................5
Evaluation of each option based on quantitative and qualitative factor......................................5
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7
Books and Journals......................................................................................................................7

INTRODUCTION
Identification of client’s current situation, financial constraints / capacity and objectives
Through the given case, it has been determined that Eric & Kim are retired couple. Eric
has already sold out his business while Kim has got back the payment of her pension.
Accordingly, they were financially stable in their years of early retirement. However, because of
stroke & resulting paralysis, $200000 has been received because of critical illness insurance but
the regular medical expenses could not be met through the medical insurance, there is no amount
left out of $200000. The payments obtained through OAS, CPP, pension and annuity as
retirement incomes are just sufficient for meeting their living expenses where Kim’s medical
treatment is yet to be met for which they are withdrawing $3000 out from RRSP which leads to
depletion of entire savings in 10 years. Additional costs of $500 per month incurred towards
house maintenance. Further, Kim has financial stress with respect to helping his son for his
outstanding debt of $250000. Therefore, Kim’s objective is to get the amount of $250000 to free
of his son from the burden of debt along with identifying the source from which they can get
returns equivalent to $3500 to meet the medical expenses of Eric as well the cost of house
maintenance each month (Di Lorenzo and et.al., 2022).
ISSUES & OPPORTUNITIES
Current financial challenge & needs of the client, analysis of each strategic option
Kim as a client is currently facing financial challenge in two ways, first she is striving
hard for making monthly payments equivalent to $3000 for physical therapy and regular seeing
with the specialist in US because their medical insurance is not providing for the coverage of the
medical expenses. There is intensive need for this medical care and accordingly, the RRSP is the
only way from which they are getting money for meeting the payment of $3000 each month
which if remains continue, Kim is feared to lose the entire savings in the coming 10 years. As
Eric is not well, Kim has hired an outsider for taking care of their house who additionally
demands for $500 per month (Martinez-Lacoba, Pardo-Garcia and Escribano-Sotos, 2021).
Meanwhile, Danny, who is Kim’s son is also facing financial issues with respect to
meeting his outstanding debt of $250000 and Kim wants to help her son & grandchildren in
anyways she could do the same. This is because, Danny has obtained home equity loan to keep

his business floating post pandemic. However, his business gets failed and bank is approaching
for the remaining amount and even forcing him to foreclose his property cover his mortgage
amount. So, this is the second financial challenge that Kim wants to overcome.
On the basis of these identified financial challenges of Kim, the needs of the client are to
get lump sum amount of $250000 along with the monthly annuity of $3500 for meeting her son’s
debt obligation and her husband’s medical treatment as well as the house maintenance cost
respectively.
The two strategic options that the client have to overcome its financial challenges involve
the following:
 Selling off their house and downsize their place of living by settling down at
smaller place which would further be helpful in scaling down their housing
expense. The estimated value of the house has been found out as $2 million.
However, realtor has suggested to wait for some time as the property market is
going down as a result of corresponding rise in interest rates in the US market.
This is one of the strategic option available to Kim with the help of which she can
help her son to overcome the payment of Home equity loan (Martinez-Lacoba,
Pardo-Garcia and Escribano-Sotos, 2021).
 On the other hand, the second option available to Kim with the help of which she
can help her son and grandchildren is reverse mortgage. Reverse mortgage is a
financial agreement between the home owner and loan giver where homeowner
relinquishes equity or shares in their home rather than making installments or
payment. It is basically a type of home loan for the seniors age group above 62
where the owner of the home is allowable to convert their home equity into cash
income (Ashok, 2020). It does not allow the homeowner to make any loan
payments. The lender provides the amount against the home equity to the home
owner and after the death of owner the lender will sale it to recover reverse
mortgage principal, interest, mortgage insurance as well as fees.

Recommendations
Evaluation of each option based on quantitative and qualitative factor
Option 1: Selling home
This is the first option where Kim can sell its existing home in the property market. But this
option is not beneficial for Kim because the situation of property or real estate market is poor
because of increase in interest rates. In case if they sell their home they will get amount of home
20% below the listing price. It means the house will be sold at $2 million – $0.4 million = $1.6
million which are really huge loss. The various pros and cons of selling the home to Kim are as
follows:
Pros:
 The couple Kim and Eric need not to do huge documentation work for selling home
which save their time.
 It is one of the best way to get immediate cash of $1.6 million (Chun, 2022).
Cons:
 It will cause loss of $0.4 million to Kim as they get amount 20% downsize of home
listing price.
 The couple will lose both ownership and possession from its home if they sell it in the
market.
Option 2 Reverse mortgage
The second option of reverse mortgage is also one of the way through which Kim can solve its
financial issues. The advantage and disadvantage of reverse mortgage option to Kim are as
follows:
Advantage:
 It is one of the flexible product that can be used by the households in order to de-stress
their finances challenges.

 Under a home equity loan with a reverse mortgage, the owner does not losses possession
or even ownership till the death of the couple.
 It is tax free option whether Kim receive fixed income or in a lump sum (Haurin,
Moulton and Shi, 2018).
Disadvantage:
 The owner might require to pay property tax and homeowner insurance.
 It is one of the complicated process.
On the basis of the evaluation of both the option, it is recommended to Kim that they should
opt for option 2 that is reverse mortgage. It is because with the help of reverse mortgage, Kim
will able to get desired payment against its home from lender. Also, they need not to bear the
further loss of $0.4 million which they have to bear while opting for option 1. Further, it is also
best way to keep their possession and ownership on the house till the death of the couple Kim
and Eric (Husáková, 2018). After the death, lender can sale the house to recover the payment
which has made to the couple. It is also best for improving the immediate financial condition of
the couple Kim and Eric. There is lower risk of default in case of reverse mortgage hence it is
recommended to Kim.
CONCLUSION
After summing up the above information, it has been concluded that the reverse mortgage
is the best strategic option Kim and Eric can adopt in order to mitigate its financial challenge. It
is also best for the son of Kim to turnaround its restaurant business which has faced huge loss
after the Covid-19 situation. The report has recommended this option after analyzing the
financial situation of Kim and Eric as well as both strategic options such as selling home at low
price or reverse mortgage.

REFERENCES
Books and Journals
Ashok, S., 2020. Exploring the determinants of reverse mortgage purchase decision: evidence
from India. Journal of Internet Banking and Commerce. 25(2). pp.1-33.
Chun, H., 2022. Study on reverse mortgage user’s mid-term termination inclination. The Korean
Data & Information Science Society. 33(4). pp.589-599.
Di Lorenzo, E. and et.al., 2022. Reverse mortgage and risk profile awareness: proposals for
securitization. Applied Stochastic Models in Business and Industry. 38(2). pp.353-369.
Haurin, D., Moulton, S. and Shi, W., 2018. The accuracy of senior households’ estimates of
home values: Application to the reverse mortgage decision. Real Estate
Economics. 46(3). pp.655-697.
Husáková, M., 2018. The reverse mortgage as a financial tool for increasing the living standard
of seniors in the Slovak Republic.
Martinez-Lacoba, R., Pardo-Garcia, I. and Escribano-Sotos, F., 2021. The reverse mortgage: a
tool for funding long-term care and increasing public housing supply in Spain. Journal of
Housing and the Built Environment. 36(2). pp.367-391.