Retirement Hopes Dwindle, But Home Equity Remains

As baby boomers begin to retire, an unfortunate fact has emerged: most have not saved adequately for their post-working years.

More than 65% of Americans report they are moderately or very worried they have not saved enough for retirement, according to a 2011 Gallup poll concluding that lack of retirement funds is America’s biggest financial concern.

The lack of savings coupled with an economic shift away from traditional retirement nest eggs such as pensions and employer-sponsored savings programs is leading today’s 65-plus population to a devastating truth: they don’t have a whole lot of options.

What they do have is their homes.

Retirement in peril

The majority of workers—or 60%—have less than $25,000 in savings and investments, excluding home equity, according to a March Employee Benefit Research Institute study.

While many people can stretch the wealth they have saved over the course of a lifetime, finds another study from the National Bureau of Economic research, most people in retirement are not prepared for any unforeseen event—a sudden health care cost, the loss of a spouse, or other unexpected changes.

Making matters worse, people are living longer, and while many say they expect to work longer, it isn’t always possible.

“What can they do?” asks Tony Webb, senior economist at the Retirement Research Center at Boston College. “The obvious things: work longer. Save more. But a lot of households are not in a position to work longer. They’re suffering from mental health problems or have lost jobs. They can really have a problem.”

Further, Webb says, even those who have planned for retirement have taken missteps in many cases. They have either invested badly, too conservatively, or haven’t participated in the 401(k) plan offered by their companies.

“In theory, households now ought to be approaching the time with a sizable nest egg,” he says. “In reality, the average household level of 401(k) and IRA savings for households 55 to 64 is $100,000. If you draw down on that at 4% a year, it gives you $333 per month. That doesn’t buy you the kind of retirement you’d dreamed of.”

The recent market downturn has also left many people looking at less savings than they had pre-housing crash, despite the Dow returning to 2008 levels this year. For those on the verge of retirement at the time of the downturn, they are looking to much less than they had counted on, with uncertainty continuing to be a major driver.

“Many people had money in pensions and when the market was in freefall, they said ‘I’m going to take it out.’ A lot did buy high and sell low,” says Frank Stafford a researcher at the University of Michigan’s Retirement Research Center. “Today, they’re not feeling very buoyant.”

While the traditional forms of retirement saving are largely insufficient or are simply not an option, boomers are looking instead to the one thing they have grown over time: home equity.

“One asset almost every household has is the house,” says Webb. “I think an increasing percentage of households will turn to reverse mortgages.”

Scratch investments, look to assets

Those who had already begun to draw down their retirement savings before the housing bubble have been doing well, until recently, Stafford says. But those retiring today are facing a difficult dilemma.

“In each successive year, more and more people are asking what their assets are doing for them and whether they can draw down on them. If there is equity in the home, it may look more attractive versus other forms of investment,” he says.

The average home value for households approaching retirement is under $200,000, according to data from Boston College.

“Downsizing is not going to get those households very far,” Webb says. “They’ve got to be thinking about another option.”
A recent study conducted by the MetLife Mature Market Institute and National Council on Aging shows that households are thinking about that other option and have increasingly looked to the use of home equity in recent years—and at younger ages—with 20% of new reverse mortgage borrowers falling in the 62- to 64-year-old age range.

Additionally, some financial planners are beginning to look to reverse mortgage products as a retirement tool rather than a last-ditch option. Looking at the use of a reverse mortgage credit line in a comprehensive retirement approach is a concept most recently explored and publicized by financial planning research at Texas Tech University.

But even with a growing need for home equity conversion products and a new interest from those entering retirement age, the reverse mortgage remains stagnant at near just 2.5% penetration of the potential market, according to the latest data from Reverse Market Insight.

What’s holding reverse mortgages back?

There are several relevant factors that are keeping the penetration levels low, says Webb. Lower home equity due to declining values, higher mortgage balances and cultural traditions have all hindered the potential for reverse mortgage volume, which now lingers around 5,000 loans per month.

Today’s group of retirees are more likely to arrive at retirement having a mortgage, with the percentage of those 65 and older with a mortgage increasing from 20% historically to nearly 30% by 2007, Webb says.

Some also shifted from homeownership to renting as a result of the housing crash.

Still others are hesitant to forego leaving an inheritance for their children, or they are keeping the home equity for an emergency, often an event that never ultimately takes place, or if it does, may be decades in the future.

One piece of good news for growth: borrowers are reportedly happy with their reverse mortgages.

“Research shows people who have had a reverse mortgage have generally been very happy with  it,” Webb says. “This is good news; it means the product isn’t being mis-sold.”

A survey released by the National Reverse Mortgage Lenders Association in early 2011 conducted by Marttila Research Associates, found more than half of those reverse mortgage borrowers surveyed would definitely recommend a reverse mortgage to a family member or friend, and another 28% would “probably” do so.

On a 10-point scale, 43% marked their reverse mortgage experience a “10” with 32% rating their reverse mortgages between a six and nine.

But while those numbers are overwhelmingly positive, close to 98% of people 62 and older who qualify for a reverse mortgage still aren’t getting one.

“My gut reaction is, I can’t believe a sizable number wouldn’t benefit,” Webb says.

And despite the challenges facing the market, the perilous retirement picture may outweigh some of them—especially the idea of a home as inheritance.
“For a lot of households, the kind that might be interested in having a reverse mortgage, [leaving the home to family is] a luxury they may not be able to afford.”

This edition of RMD Report is brought to you by Landmark, a leading national appraisal management and compliance company serving the reverse mortgage lending industry

Written by Elizabeth Ecker

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