Stanford: Boomers are entering retirement with less savings, greater mortgage debt
Could home equity access be the solution?
November 9, 2018
Americans are now living longer than ever before, and experts predict that a record number of Baby Boomers will soon enter retirement.
But when compared to past generations, the Stanford Center on Longevity has discovered the landscape of homeownership and retirement in America is changing – for the worse.
In its report, titled “Seeing Our Way to Financial Security in the Age of Increased Longevity,” Stanford points out Baby Boomers are entering retirement with less savings and greater debt.
The report points to an increase in mortgage debt among older homeowners as a concern, noting that in 2012, one-third of homeowners over 65 were still paying off a mortgage – up from less than a quarter of homeowners in 1998. And, the amount owed on a mortgage has nearly doubled from $44,000 to $82,000.
“Considering the vast size of the Boomer population, increased life expectancy, and the rate at which today’s Boomers are retiring, being ill-prepared for retirement has profound implications for the overall well-being of individuals, families, and society today and for generations to come,” the report states.
According to the report, in terms of home equity accumulation and total wealth, Baby Boomers are financially weaker than earlier generations of retirees.
Stanford’s data reveals that in 2014, one-third of Baby Boomers had no money saved in retirement. For those who did, the median balance was just $200,000 – surely, not enough to foster a comfortable retirement.
Although society’s approach toward retirement has changed little, retirees will now have to stretch their personal means even further, Stanford’s report said.
“Our findings illustrate that the majority of American workers from all backgrounds aren’t on a path to retire full time at age 65 under their pre-retirement standard of living,” the report states. “As a result, it’s likely they’ll need to consider alternative models of retirement, such as working beyond traditional retirement age, changing one’s standard of living in retirement, strategies for deploying retirement savings or some combination of these models.”
For some Baby Boomers looking to supplement their income in retirement, home equity could provide a solution.
According to the latest NRMLA/RiskSpan Reverse Mortgage Market Index, aggregate home equity levels for homeowners 62 and older hit $6.9 trillion in the second quarter of 2018. This was a $130 billion jump from the previous quarter.
“If you consider that the typical retiree household might have one or two incomes from Social Security, a modest pension and/or limited income from low-yielding fixed-income instruments, and, perhaps, a diminished 401(k) account, then home equity becomes their greatest asset and an important resource for funding their future,” said Peter Bell, president and CEO of the National Reverse Mortgage Lenders Association.
Alicia Munnell, director of the Center for Retirement Research at Boston College, told HousingWire home equity is likely to become an increasingly important part of the retirement income puzzle, however people choose to tap it.
“People will turn to home equity to supplement their retirement income,” she said. “I am really committed to this notion that the house has to be part of the answer to the retirement security challenge.”Reverse mortgages for seniors loan expert Shelley Giordano’s book, ”What’s the Deal with Reverse Mortgages?” describes four reverse mortgage “nevers” and several reverse mortgages definitions to help alleviate common misconceptions:
You never give up title to your home.
You never owe more than your house is worth.
You never have to leave your home as long as you maintain the property, the taxes on it and the home’s insurance.
You never have to make loan repayments in advance of leaving the home unless you choose to do so.
Pfau’s book explores several viable uses for a reverse mortgage, such as using it to:
Provide payments for a fixed period to pay for living expenses while you’re delaying Social Security as a purposeful strategy to optimize that benefit.
Pay off a conventional mortgage to reduce monthly housing expenses.
Fund remodeling costs that help you age in place.
Create a liquid asset through a reverse mortgage line of credit that can be tapped for emergencies or that grows to be used late in life for medical or long-term care expenses.
Pay for premiums for long-term care insurance.
Design a strategy to reduce “sequence of returns” risk with invested assets. With this strategy, when the stock market drops, you tap the reverse mortgage line of credit for living expenses, which buys time to allow invested assets to recover. After the market rebounds, you can switch back to withdrawing from your invested assets.
Pay for living expenses if your financial assets become depleted.
Pfau’s book contains analyses that show it’s best to take out a reverse mortgage line of credit early in your retirement, before you might start tapping it.Of course, reverse mortgages aren’t for everybody, particularly if you don’t plan to stay in your home for many more years. In this case, it may not be worth incurring the up-front expenses.On the other hand, if you have substantial home equity, if your financial resources aren’t sufficient to enable you to retire and if you really want to retire, you’d be wise to explore all of your options to deploy your home equity
CNBC included reverse mortgage loans in a list of “innovative approaches” to protecting retirees’ portfolios in down times, citing a financial advisor who said he and his colleagues would be “remiss” if they didn’t suggest Home Equity Conversion Mortgages as a potential option.Rob O’Dell, a certified financial planner in the Naples, Fla. office of the Coyle Financial Counsel wealth management firm, told the network’s website that the reverse mortgage industry has “cleaned up this space to benefit the end consumer.” “The HECM positions the portfolio for longevity, O’Dell said, by having the client tap the line of credit instead of assets when the market is down,” the post notes, echoing an increasingly popular angle for promoting the reverse mortgage. “In this way, assets are preserved and have the opportunity to keep growing through the years.”
As the American population ages, experts have increasingly pointed to home equity as a key source of retirement income — even as many older homeowners remain hesitant to tap into it for reasons that continue to confound both academics and players in the mortgage industry.Steven Sass, a research economist at Boston College’s Center for Retirement Research, has studied the behavioral roadblocks to home equity extraction, and concluded in a recent Boston College brief that the main culprits are lack of understanding and fear, as RMD recently reported.“There’s not really a rational reason to avoid a reverse mortgage,” Sass told RMD in a recent phone interview. “It might be a fairly sophisticated analysis, but it makes sense for a lot of people.”Sass pointed a finger at some familiar targets, including the deep-seated aversion to going into further debt among older folks, as well as the sense of accomplishment and satisfaction that can come from owning a home free and clear. But he also mentioned distrust of financial institutions in general, as well as a general inability to imagine a need for future cash early in retirement — a key reason many retirees don’t think to open a reverse mortgage line of credit soon after turning 62.“If you have a sufficient income to cover your expenses, is there any great need to go out and secure this line of credit or get the money?” Sass asked rhetorically. “So I think people might need some impetus to use a reverse mortgage.”That impetus could be the only way to convince older homeowners that a Home Equity Conversion Mortgage is a good idea, and Sass said the breaking point might start coming earlier and earlier. Social Security benefits could retract in the future, he said, and more and more boomers are entering their retirement years without sufficient cash or investment savings.“The elderly will be increasingly dependent on savings to support their standard of living, maintain their consumption needs,” Sass said, noting that many of them won’t have employer-paid pensions or extensive Social Security benefits. “As households increasingly need to use their financial assets, at that point, home equity might be viewed as another store of savings and more households will consider using home equity in lieu of, or in combination with, financial outlets. “To really access your home equity, the two primary ways are to downsize or to take out a reverse mortgage.”
Reverse Mortgage Can Help with Long-Term Care
04/22/2004 | ConsumerAffairsBy Unknown Author
Reverse mortgage loans have the potential to pay for long-term care at home, according to a study released by the National Council on the Aging (NCOA). Theres been a lot of speculation whether reverse mortgages could be part of the solution to the nations long-term care financing dilemma, said NCOA President and CEO James Firman. Its clear that reverse mortgages have significant potential to help many seniors to pay for long term care services at home.In 2000, the nation spent $123 billion a year on long-term care for those age 65 and older, with the amount likely to double in the next 30 years. Nearly half of those expenses are paid out of pocket by individuals, and only 3 percent are paid for by private insurance; government health programs pay the rest. According to the study, of the 13.2 million who are candidates for reverse mortgages, about 5.2 million are either already receiving Medicaid or are at financial risk of needing Medicaid. This population would be able to get $309 billion from reverse mortgages that could help pay for long-term care. Weve found that seniors who are good candidates for a reverse mortgage could get on average $72,128. These funds could be used to pay for a wide range of direct services to help seniors age in place, including home care, respite care or for retrofitting their homes, said Project Manager Barbara Stucki, Ph.D. Using reverse mortgages for many can mean the difference between staying at home or going to a nursing home. The study is part of NCOAs National Blueprint for Increasing the Use of Reverse Mortgages for Long-Term Care, to be published in June. The blueprint will offer new insights into the potential market for reverse mortgages and recommendations for administrative action, regulatory changes, consumer protections, and demonstration programs.Reverse mortgages are a special type of loan allowing people aged 62 and older to convert equity in their home into cash while they continue to live at home for as long as they want.“Borrowers are responsible for paying property taxes, homeowner’s insurance, and for home maintenance. Eighty one percent of households in the U.S. with homeowners age 62 and older own their own homes and many own them free and clear.Seniors can choose to take the cash from a reverse mortgage as a lump sum, in a line of credit or in monthly payments. If they choose a lump sum, for example, Stucki said that they could pay to retrofit their home to make kitchens and bathrooms safer and more accessible especially important to those who are becoming frail and in danger of falling. If they choose a line of credit or monthly payments, an average reverse mortgage candidate could use the funds to pay for nearly three years of daily home health care, over six years of adult day care five days a week, or to help family caregivers with out-of-pocket expenses and weekly respite care for 14 years. They could also use it to purchase long-term care insurance if they qualify.
Women Face Deep Disadvantages in Retirement
Reverse,HECM,News,NRMLA,Reverse Mortgage | 2 Comments NEW YORK — Women account for a disproportionately large chunk of retired Americans, but shoulder a disproportionate amount of the burdens that older folks carry as they age.Linda K. Stone, an actuary and a senior fellow at the Women’s Institute for a Secure Retirement (WISER) in Washington, D.C., on Tuesday laid out some stark statistics in a panel discussion at the National Reverse Mortgage Lenders Association’s eastern conference and exposition in New York City. Women don’t just earn less because of the enduring pay gap — they also take extended time off to take care of children or other family matters, clocking an average of 12 years out of the labor force. “That’s going to have a big impact on your Social Security income,” Stone said, as Social Security calculates benefits in part on the amount of time one spends in the workforce. In addition, women are far more likely to work part-time during their careers in order to juggle childcare, and even those who work full-time might have to decline promotions or positions that require significant travel, potentially restricting access to employer-sponsored retirement plans and hindering their ability to build significant quantities of retirement savings.And after a lifetime of these structural and social disadvantages, women often find themselves alone in their golden years: There are 6 million more men than women above the age of 65, Stone said, as men generally have shorter life expectancies.“For most women, widowhood is inevitable,” Stone said, and often for an extended amount of time: 15-year periods of widowhood are not uncommon.Once the husband is gone, the widow loses his Social Security benefits, and may have to endure health problems alone — often after providing care to their ailing husbands toward the end of their lives. And while many couples plan for a long retirement, Stone pointed out that older married folks tend to only think about their life together as a couple, and not about what might happen when one of them dies.Faced with these facts, reverse mortgages can be a significant part of women’s retirement planning, according to Lorraine Geraci of Finance of America Reverse. After a presentation touting the benefits of the Home Equity Conversion mortgages over other options, such as a home equity line of credit or sharing housing with other older women, “Golden Girls”-style, Geraci said the key to marketing reverse mortgages to older women is a matter of semantics.Instead of talking about “long-term care,” she said, use “extended care,” and note that reverse mortgages can allow adult children to provide care for their elderly mothers in the family homestead. To fight the stigma of HECMSs as loans of last resort, talk about how the products can “sustain longevity,” “maintain a lifestyle,” or “increase the wealth” of an older borrower when pitching reverse mortgages — specifically the HECM line of credit — to widows and other potential clients.“All of us should be selling these like crazy,” Geraci said of the reverse mortgage line of credit.Stone discussed another “economic shock” for older women: divorce. As RMD reported earlier this month, “gray divorce” is on the rise in America, with split rates among older Americans rising faster than those in any other age group. Divorced women might lose out on their husbands’ retirement plans, though Stone said that access to pensions or other defined benefit plans can often be negotiated as part of the divorce proceedings.In addition, people who who have been married for more than 10 years can use their ex-spouses’ work histories when determining Social Security benefits, with husbands generally having a more favorable benefit calculation than wives. Stone joked that she often tells women who have been married for nine and a half years but are considering divorce to hold their horses.“It may be financially better for them to hang in for those last six months,” Stone said.