Baby boomers are redefining retirement based on their numbers alone. Research from the Joint Center for Housing Studies at Harvard University estimates the aging baby-boom generation will lift the number of households aged 65 and over by some 10.7 million over the next 10 years. These nearly 80 million Americans, born between 1946 and 1964, have experienced major shifts in culture and politics, from the assassination of John F. Kennedy to the introduction of the iPad. Boomers are also the first generation to reach retirement following the seismic changes in how seniors plan and pay for their later years.
Previous generations enjoyed the comfort of defined employer-funded retirement savings. The plan was clear: Workers were rewarded for their loyalty with a pension and certainty of income during retirement. That’s no longer the case; the shift to employee-funded savings, such as 401(k) plans, transferred the burden of saving to the individual. “So many of the traditional pillars of retirement security have dissolved, and nothing has risen to replace them,” says Ramsey Alwin, vice president of economic security at the National Council on Aging. “Not only have we not modernized or upgraded our systems and policies to reflect the new economic realities, [but] there are major systemic policy dinosaurs on top of a recession that wiped out what little people had saved up.” Boomers are facing retirement with little savings, no roadmap and lots of uncertainty.
Hard Knocks
The Great Recession hit retirees and soon-to-be-retirees hard. And unlike younger generations, boomers have very little time to recover from their losses. Key assets including home equity, investment portfolios and employment opportunities all declined or evaporated completely—and that assumes seniors had begun planning for retirement at all when the recession began.
“We know that about half of seniors are not prepared for retirement,” says Marty Bell, executive director of the National Aging in Place Council and senior VP of NRMLA. “The other half tried to be responsible, but the recession, the rising cost of college, or the need to support their parents and their children exhausted their savings. They might have been responsible and saved for retirement, but still find themselves unable to live the lifestyle they want in their golden years.”
For most seniors, the bedrock of their retirement-funding plan is over their heads, literally. Housing equity is still the primary wealth driver for older Americans, despite sliding housing values due to the burst of the housing bubble. The average senior has $125,000 in equity in their home. Personal savings and funds from 401(k)s, IRAs or other accounts lag far behind. Sixty percent of seniors surveyed by the Employee Benefit Research Institute reported the total value of their household’s savings and investments, excluding the value of their primary home and any defined benefit plans, as less than $25,000. This figure includes the 36 percent of respondents who said they have less than $1,000 saved. These limited savings will not support a senior household for one year, let alone 20 to 30 years. Responsibly accessing home equity will be essential to covering the gap, yet less than 30 percent of seniors saw drawing on home equity as a source of income in retirement, according to research from the Insured Retirement Institute.
Home equity may be the largest piece of the retirement funding puzzle, but many seniors are also retiring with outstanding mortgage liability. Roughly 40 percent of older homeowners had a mortgage in 2010. The average mortgage debt for older seniors was $130,515. To put it another way, mortgage payments equal 16 percent of these seniors’ gross annual income. “More seniors retiring with mortgage debt is a disturbing trend,” Alwin says. “Lower- to moderate-income seniors are most at-risk. Many are living on the edge, one crisis away from plummeting into severe economic insecurity.”
Their homes are their most lucrative asset and most boomers have no intention of leaving them. Less than 4 percent of people age 65 or older have plans to move within the next 12 months, according to a study by the Joint Center for Housing Studies. The desire to stay put stays constant; seniors tend to remain in their homes until they reach 85 years old, when moving in with family or to assisted care facilities becomes more common.
The choice to age at home comes with consequences. “Older homeowners are more likely to have an older home with increased housing maintenance and repair costs. Older homeowners may not have the money available to cover big-ticket items like roofs or structural repairs. Even if there aren’t major issues, there are costs for seniors associated with aging: they could be small, changing knobs and pulls; or large, installing lifts and total remodels,” says Daniel McCue, research director of the Joint Center for Housing Studies.
Home-related debt is not the only drain on seniors’ finances. Overall debt is also on the rise. The Center for Retirement Research at Boston College found the number of seniors with outstanding debt grew from 48 percent in 1998 to 62 percent in 2010. Debt is often a deciding factor in retirement decisions; the same study found seniors with debt are more likely to continue working beyond retirement age.
Retirement, Redefined
The numbers may not paint a rosy picture, but baby boomers are not a group to accept the status quo. “You aren’t dealing with the greatest generation or the silent generation. Baby boomers have a different emotional predisposition to the concept of aging,” Alwin says. “Boomers never thought they would age. As a result, they are redefining retirement.” After their homes, the second-most valuable asset of boomers is the boomers themselves. Supported by increased longevity, the retirement age has increased by five years to 62 over the past two decades. For some seniors, especially the most economically endangered, working longer is a necessity. But for many, delaying retirement is not a must-do, but a want-to-do. Expanding the focus of retirement planning to include a mix of savings and income, along with wellness, emotional well-being and financial health, appeals to boomers’ desire to stay young and active.
It is up to reverse mortgage professionals to show seniors how the product fits into this holistic approach. It’s not about selling, but rather education, Bell notes. “Anyone who goes in and speaks with seniors needs to understand all of the options available—including reverse mortgages—and think of planning as creating a meal from a menu,” he adds. When it comes to how seniors are getting information about retirement planning, friends, family and community organizations are the most trusted sources. “There is information overload but when you look at what resonates, it is information from sources seniors trust,” Alwin says. “The challenge is getting the information in front of them at the right time in order to influence the planning process.” Partnering with financial planners or advisors is an option, although Bell estimates only 8 to 10 percent of seniors are enlisting the help of planning professionals.
Looking Forward
The baby boomer generation is a moving target. They will continue to reach retirement age at a rate of 10,000 per day for the next 15 years. The youngest, who are turning 50 this year, will again impact how seniors plan for retirement. Tech-savvier than their older counterparts, the reliance on friends and family as the primary source of planning and information will decrease as individual empowerment and choice become even more important. “For the future senior, smartphone apps and other online resources will be more important tools for education and outreach,” Alwin says.
The tail end of the baby boomer generation also has greater losses to recover. They took more of a hit to equity, investments and income during the economic downturn. Those aged 50 to 60 experienced significant foreclosure rates and lost wages at a time when saving for retirement should have been at its peak, the consequences of which will continue to be seen. The hard-learned lessons of the economic downturn have given the younger boomers a distinct advantage that will influence future generations. They are taking retirement planning seriously and looking for ways to get prepared sooner.
There is a perfect storm of opportunity for reverse mortgage professionals. Baby boomers are reaching retirement at record numbers. Changes in defined benefit programs and the economic events of 2007 to 2009 have left boomers feeling less than secure in their financial future. Recent and continuing changes to the HECM product leave it better positioned for reinvention as a retirement planning tool intended to aid in bridging the savings gap boomers face. The program can help to alleviate some of the financial burden by transforming the largest wealth driver for many seniors, their homes, into an accessible income for years to come.
