Reverse mortgages must be done carefully

Q: About reverse mortgages: Assuming the old and new homes are of similar value, why sell the current free-and-clear home and pay real estate sale fees, plus moving, plus purchase costs, when you could just stay in the existing home and take out a reverse mortgage on it? - E.B., by email

A: Every choice has to be carefully considered for the reason you point out: The expense of taking a reverse mortgage is significant. For many, simply taking a reverse mortgage on their current (and equity-rich) home is a good solution. They can pay off the remains of a mortgage and still have a line of credit to meet future expenses.

But others may want to leave a home that is too large or expensive to maintain. They'll want to use the home equity from one house to move to a less expensive and smaller house, perhaps in a different area. They'll want to create a pool of savings to protect them from future emergency expenses. Some retirees, for instance, may want to trade their traditional home in a state with an income tax for a "lock-it-and-leave-it" condo in a no-income tax state.

• Scott Burns is a principal of the Plano, Texas-based investment firm AssetBuilder Inc., a registered investment adviser. Questions about personal finance and investments may be sent by email to scott@scottburns.com.

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Q: I retired last year with combined retirement savings of $870,000 for my wife and me. We're 40/60 stocks and bonds. The recent stock market volatility has dropped our retirement account to $780,000. I am concerned,

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and while I know it is against everyone's advice to "time the market," I have told our Fidelity manager that I will not stay in the market if we fall to $700,000. During the last big crash we lost about 25 percent.

Fidelity tells me I would be making a big mistake. But my feeling is that once the market turns around, I may forgo a few months' growth, but not have to come back from a much bigger loss. My wife and I can meet both debt and discretionary expenses with pensions and Social Security. Our home is debt-free. We haven't withdrawn any money from our Fidelity IRAs. We plan to use the money in those accounts for emergencies and special travel (Hawaii, Europe, etc.). I am 64 and my wife is 70. She will have to begin withdrawals soon due to IRS regulations. - L.P., by email

A: You're not alone in rethinking how much you can stand in losses - memories of terror in 2008 and early 2009 are still fresh for everyone. But there is another way to look at your risk, tailored to your specific circumstances. The first thing is that your portfolio, at 40 percent equities, is already very conservative. The other factor is when, and how, damage is done to your security.

Let's start with some figures. Sixty percent of your portfolio is in fixed income. Bonds have credit risk and interest rate risk, but if your fixed-income holdings are relatively short term, that risk can be modest. So you have about $468,000 in relatively low-risk securities. Now let's see how that plays out against required minimum distributions.

If every dime of your $780,000 were in your wife's retirement account, she would soon be making an RMD (required minimum distribution) at the initial 3.65 percent. That would be about $28,500. At that withdrawal rate, you could make distributions from the fixed-income side of your accounts for about 16 years before you'd need to sell any equities.

In fact, since you are younger and part of the money is in retirement accounts you won't have to access for years, the actual distributions will be smaller. When you start making distributions, your wife will be making distributions at a higher rate, but it will still be less than 5 percent.

The bottom line is that it will likely be many years before you'd need to sell risk assets and realize losses. The longer that period is, the greater the odds that your equity holdings will recover any losses and show actual growth. According to Crestmont Research, for instance, over all rolling 10-year investing periods from 1900 to 2015, stocks have shown positive returns about 95 percent of the time.

Your first line of defense is that you start with relatively low-risk exposure. Your second line of defense is how you make distributions from your retirement accounts.