Retirement Plan Integration:
Meeting the Needs of Non-Affluent Retirees

August 31, 2022

An integrated retirement plan is one in which the components fit together in ways that generate the best possible plan for the retiree. The components are the retiree’s financial assets, annuities, and (if the retiree is a homeowner) a reverse mortgage or partial equity sale. Integration done correctly generates synergies that are not available when the components are combined haphazardly. It also reduces the prices of the components. The synergies and competitive prices increase spendable funds and/or estate values available to the retiree over the remaining years of life.

The Retirement Transition: From the Simple and Orderly to the Complex and Chaotic

Pre-retirement, the goal is to accumulate as much wealth as possible. An industry of financial asset managers is available to help guide the process. Post-retirement, the objectives become more diffuse. Because the retiree doesn’t know how long she will live, potential conflicts arise between spending in early years versus the danger of running out. Those who want to leave an estate face a similar conflict of objectives.   

But the biggest challenge facing new retirees with limited wealth is the multiple tools available for drawing funds, each of which has options connected to it. This poses questions for the retiree such as the following:

  • Should I use some of my financial assets to insure against running out of funds by purchasing an annuity?

  • If I purchase an annuity, how long should I wait before the annuity payments start? And should I purchase protection against early death?

  • Should I use the equity in my home to increase my spendable funds during retirement?

  • If I elect to use my home equity, should I borrow on it with a reverse mortgage or sell a part of the future appreciation?

  • If I elect to take a reverse mortgage, which of the several options for drawing funds should I select?

The financial system as constituted today provides little to no assistance because all the components of retirement plans are delivered by specialized providers: financial asset managers manage assets, insurance companies offer annuities, reverse mortgage lenders offer reverse mortgages, and home equity purchase firms purchase home equity. None of them guide the retiree on how the different components can fit together into a coherent retirement plan.      

Who Needs a Coherent Retirement Plan?

It is most needed for retirees whose wealth is largely in their homes. As shown in Table 1, the median net worth of retirees aged 65-74 was only $266,000 in 2019, of which $240,000 was in their homes. That means that at least half of them live in fear of running out of spendable funds.

The average net worth was 4.6 times as large as the median, reflecting the markedly unequal distribution of wealth that characterizes retirees. Furthermore, wealth inequality among retirees has been rising. Between the third quarter of 1989 – the earliest date for which wealth data are available from the Survey of Consumer Finances -- and the second quarter of 2021, the wealth of the lower half of wealth holders rose by 304% whereas the wealth of the top 1% rose by 800%. In addition, the share of wealth accounted for by residences increased over time for the lowest wealth group, whereas for higher-wealth consumers it declined.

Source: Federal Reserve Survey of Consumer Finances

What Is a Retirement Plan?

For the well-heeled retiree, a retirement plan consists mainly of financial asset management, a service provided by an industry of financial advisors. Forbes in its 2022 Annual Billionaires Issue for 2022 lists about 400 of the most successful, selected from a total that “exceeds 6500”. This industry does not meet the needs of the larger group of retirees whose wealth is largely in their homes. For this group, a retirement plan, in addition to financial asset management, requires the following:

  1. An annuity, because it provides spendable funds for life, but payments might not begin for some years, termed the deferment period.

  2. A home equity conversion program that converts home equity into spendable funds. The program may be loan-based, where the retiree borrows against the house, termed a reverse mortgage. Or it may be equity-based, where the retiree sells part of the equity and/or appreciation in the equity.

  3. Integration of the separate components into a single coherent plan.

  4. An educational program designed to allow retirees to understand how this multi-pronged process would work for them. The sections that follow can be viewed as components of such a program.

A Core Feature: Making the Plan Visible to the Retiree

A critical part of a coherent retirement plan is a time series chart that displays the multiple integrated parts: the spendable funds available to the retiree, preset to rise every year to at least partially address inflation; and the value of his estate, every month through age 104. The chart allows the retiree to see exactly how different assumptions would affect the plan.

The illustrative charts shown below apply to John, a single male retiree of 64 who has a house worth $500,000 and $250,000 of financial assets.

On Charts 1A and 1B, the rate of return on financial assets is 3%, the annuity deferment period is 15 years, the preset rise in spendable funds is 2%, and a credit line drawn from a HECM reverse mortgage is used in part to pay for the annuity and in part to provide spendable funds during the annuity deferment period. The dotted portion of the spendable funds line in Chart 1A shows draws from financial assets while the solid portion of the line shows annuity payments. The dotted line in Chart 1B shows the retiree’s estate value.

Chart, line chart

Description automatically generated

Chart, line chart

Description automatically generated 

A more detailed chart that allows retirees to develop their own retirement plan is available on our web sites, and


Adjusting to Market Changes: Higher Than Expected Returns

No retirement plan will materialize exactly as planned because the world changes in ways that are often unpredictable; interest rate volatility is a critical case in point. A workable retirement plan is one that anticipates changes in portfolio returns in both directions and incorporates effective ways to deal with them.

If rates of return on financial assets rise during the deferment period, the simplest adjustment is the purchase of an immediate annuity at the end of the period. Chart 2 provides an illustration. It assumes that John who is currently earning 3% on his assets at the outset, finds that the yield rises to 6% over the first year, generating excess assets that are used to purchase an immediate annuity. This results in a jump in spendable funds after 15 years.

John doesn’t have to wait for 15 years, he could use the excess assets available after, say,10 years or 5 years and buy the second annuity then. His spendable funds would rise at the earlier point but by less than if he had waited until the end of the deferment period.  This is illustrated in Chart 2, in which John responds to a rise in rates from 3% to 6% by purchasing an immediate annuity after 5, 10 and 15 years.



Description automatically generated


However, converting excess assets before the end of the deferment period runs the risk that the rate of return on assets declines after the conversion which, if not provided for, will cause a drop in spendable funds. One way to avoid this is to assume an initial rate so low that the probability of further declines is extremely low. In mid-2022, the 3% rate in the example would meet this condition. Another way of dealing with lower-than-expected returns, which is consistent with a higher assumed asset return, is described below.

 Adjusting to Market Changes: Lower Than Expected Returns

This approach denotes some of the financial assets as a set-aside, which is not used in calculating spendable funds, making it available as a reserve in the event that rates of return are below expectations. This is illustrated by Chart 3. The top line of spendable funds assumes an expected rate of 6% while the declining line is based on the assumption that a 3% rate materializes.  The lower stable line is based on the set-aside of $17,450 required to offset the lower rate.



Description automatically generated


If John elected to do a set-aside that would cover a return rate decline to 3% (in this case the required set-aside would be $17.450) but the rate that materialized was 6%, he has a choice regarding the disposition of the “unused” set-aside. It could be used to purchase an immediate annuity, thereby enhancing his spendable funds, or he could retain it to enhance his estate value. These options are illustrated by Charts 4A and 4B, which assume that John elects to purchase another annuity at the end of the deferment period. It could be purchased at any time but deferring it eliminates the risk of a decline in rate of return after the purchase.


Chart, line chart

Description automatically generated

Chart, line chart

Description automatically generated


The Need for Competitive Pricing

In both the annuity market and the HECM reverse mortgage market, the prices charged vary widely on transactions that are otherwise identical. This reflects their complexity and their novelty – very few retirees transact more than once, so there is little opportunity for retirees to learn how to shop these markets. Because of this, an effective retirement plan requires a technique for finding the best competitive prices.

In Chart 5 below, prices quoted to John are drawn from networks of annuity providers and reverse mortgage lenders. This approach discloses not only the best prices from those included, but also the worst. At the best terms (for annuities this includes providers with an AM Best rating of A+ or higher), and assuming a HECM term payment of 15 years, John’s monthly spendable funds in the first month are $2978 while at the worst terms they are $2651. This spread is a conservative estimate because it covers only those willing to post their prices. The very worst don’t participate in price networks.

Note that the price spread is smaller at deferment periods shorter than the 15-years assumed in the chart, and larger at rates of return on assets above 3%.


Chart, line chart

Description automatically generated


Selecting the Best Annuity Deferment Period

The deferment period that generates the highest schedule of spendable funds depends on the rate of return on financial assets. Higher returns extend the deferment period over which spendable funds can be provided from the assets, while longer periods increase annuity amounts because of greater mortality.

This is illustrated for John in Charts 6A, which is based on a rate of 6%, and 6B which is based on a 3% rate. In 6A, the longer deferment period generates significantly more spendable funds while in 6B the different deferment periods result in similar levels of spendable funds. (Note that retirees with financial assets greater than their home equity can benefit from short annuity deferment terms in some cases.)

Chart, line chart

Description automatically generated


Chart, waterfall chart

Description automatically generated   


Loan-Based Versus Equity-Based Methods For Accessing Home Equity

To this point, it has been assumed that the method used to access home equity is debt-based, in that the retiree’s house serves as collateral to guarantee repayment. An alternative approach is equity-based where the retiree sells the right to a portion of the future growth in the value of the home. Most retirees will probably opt to make that decision early in the process.

One important difference between debt-based and equity-based approaches is that debt-based plans generate more spendable funds while equity-based plans generate larger estate values. This is illustrated in Charts 7A and 7B.



Chart, line chart

Description automatically generated


Chart, line chart

Description automatically generated


There are other differences in the two approaches that could be compelling. One disadvantage of debt-based plans is that in the current regulatory climate, annuities can’t be funded with reverse mortgages. This is a serious drawback for the least affluent retirees. A second disadvantage is that in the event the retiree must move out of the house for any reason, the HECM must be repaid and the credit line on which the retiree has been drawing disappears. This is not an issue with equity-based plans because it has no effect on the retiree’s ability to draw spendable funds.

On the other side of the ledger, greater than expected house price appreciation can be converted into increased spendable funds by refinancing the loan. There is no such option on an equity-based plan.

Timing of Spendable Funds Availability

An integrated retirement plan would allow retirees to adjust the timing of their spending to their life style expectations. For example, the retiree who plans to travel the world for several years before settling down might opt for a plan that provides increases in spendable funds early on, followed by smaller draws in later years. Other retirees may anticipate that their needs will be greater in future years. These options (of the many that are possible) are illustrated in Chart 8.


Chart, waterfall chart

Description automatically generated


Retirement Plan Delivery Structure

Implementation of the plan while maintaining the integrity of the process would involve the following participants:

Program Coordinator (PC): The PC is responsible for the plan. Its major functions are as follows:

  • Provides and supports the technology used to deliver plans.
  • Selects, trains, and supports advisors, monitors their compliance with pricing rules, and with the requirement that the plan meets the needs of retiree clients
  • Compensates advisors, lead sources and others
  • Manages networks of competing annuity providers and HECM reverse mortgage lenders. (Management of equity participation investors may be sub-contracted.)
  • Is responsible for meeting legal requirements designed to protect consumers, and to impose other requirements as needed – see the section that follows.


Note that the authors will provide promising PCs with access to the retirement plan technology and the networks of annuity providers and reverse mortgage lenders they have developed.

Lead Sources: These are the entities that are responsible for establishing contact with retiree clients. They could be commercial banks, credit unions, advisory firms, individual advisors, or independent web sites. Reverse mortgage lenders and annuity providers could also be lead sources subject to the pricing restrictions described in the next section.

Advisors: These are the people who consult with and offer advice to retiree clients. They could be employed by a lead source or operate independently.

Guaranteeing the Integrity of the Process

The PC is responsible for meeting legal requirements designed to protect consumers, and to impose other requirements as needed for that purpose. The protections, which are fully consistent with FHA Section 255(n)(1), include the following:

  • Advisors are required to provide the best terms offered on the networks unless the retiree prefers a different provider.
  • Lenders and investors would not receive any part of annuity commissions, and licensed annuity providers would not receive any revenue from HECM lenders or investors.
  • Plan annuities would be fixed annuities; variable annuities would not be allowed.
  • The retirement plans must be demonstrably superior to any stand-alone combinations of the same basic features.
  • HECM reverse mortgage lenders and annuity providers acting as lead sources providing their own HECM or annuity would be required to provide the best prices available on the plan’s networks.


Concluding Comment: What Are the Barriers?

HECM reverse mortgage lenders are deterred by fear of violating HUD rules that are antithetical to annuities. Annuity providers won’t write annuities that have been financed with reverse mortgages because of fear of incurring liability to heirs of the retiree, as well as concern that their insurance regulator will not view such transactions as being in the best interest of the retiree. These concerns are all addressed by the type of integrated retirement plan described in this article.

Well-meaning consumer advocates, such as CAARMA, have criticized the HECM reverse mortgage program, based on transactions that were either over-priced or did not meet the borrower’s needs. The integrated retirement plan would eliminate such concerns.

The Federal Government has been a drag. In addition to draconian restrictions on useful combinations of HECMs and annuities cited above, programs that focus on meeting economic needs measure need by income. In the case of retirees, need should be measured by net worth.

Most financial advisory firms denigrate annuities which reduce the financial assets of clients on which their fees are based. Some of them, however, would find it profitable to participate in integrated retirement plans as lead sources and/or advisors, if such plans were available.


In or near retirement? The Professor’s Retirement Funds Integrator (RFI) might enhance your life during retirement.

Want to shop for a Reverse Mortgage from multiple lenders?

Sign up with your email address to receive new article notifications