Reverse Mortgages Can Defend Against the Coming Retirement Crisis

Today’s working Americans face a brewing retirement crisis, but luckily there are ways to minimize the risk of falling short. One solution: tapping home equity via a reverse mortgage, a recent report suggests. 

About half of working-age households are at risk of being unable to maintain their pre-retirement standards of living, but fortunately, the tools to fix the problem are at hand, says a Center for Retirement Research at Boston College brief “Falling Short: The Coming Retirement Crisis and What to Do About It.”

“Many households have a little-recognized asset that they could turn to for income in retirement — the equity in their home,” writes Alicia Munnell, director of the Center and the Peter F. Drucker Professor of Management Sciences in Boston College’s Carroll School of Management.

While retirees have generally thought their home equity as more of an emergency reserve rather than a potential source of retirement income, the challenge today of ensuring retirement security has made this traditional view a luxury that many can no longer afford. 

For households that do not have enough from Social Security and their 401(k) assets, Munnell suggests they should consider tapping their home equity by either downsizing or taking a reverse mortgage. 

Downsizing can provide extra funds that can be used to generate retirement income, while also cutting expenses for utilities and property taxes. 

On the other hand, a reverse mortgage allows retires to access their home equity if they prefer to remain in their home. Munnell also notes that recent policy changes by the Department of Housing and Urban Development “have strengthened the agency’s HECM program, which is the dominant vehicle for reverse mortgages.”

“Americans need to recognize that their home equity can make a big difference to their retirement security,” Munnell writes.

Getting more people to tap home equity is just one facet of the three-prong solution policymakers must heed to help more Americans better prepare themselves for retirement, the report suggests.

Other policy steps include promoting a message of working longer to delay retirement and ensure financial security once work ends, and addressing shortcomings in Social Security and 401(k)s.

“The retirement income landscape has been changing in a way that systematically threatens the retirement security of millions of Americans,” Munnell writes. “Federal policymakers could take the lead in ushering the necessary changes that will promote longer worklives, more saving, and the use of home equity. There is no time to waste, so let’s get started.”

View the Center for Retirement Research brief.

Written by Jason Oliva

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