Future Retirees Can No Longer Ignore Using Home Equity says Study

201003100748.jpgNew research from the Center for Retirement Research (CRR) at Boston College found more than 60 percent of households are “at risk” of being financially unprepared for retirement.

The latest analysis of the National Retirement Risk Index (NRRI) examines how not taking full advantage of housing equity affects the share of U.S. households ‘at risk’ of being un-able to maintain their pre-retirement standard of living in retirement.

“Even after the bursting of the housing bubble, our research shows that home equity remains a major financial asset and can significantly impact retirement security,” said Center Director Alicia H. Munnell. “The impact of home equity on the percent of households ‘at risk’ is greater than that of the recent stock market crash. How baby boomers and future generations decide to use their home equity could determine how well many fare in retirement.”

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According to the brief, not tapping home equity through a reverse mortgage increases the percent of those ‘at risk’ by about 10 percentage points, raising the NRRI in 2009 from 51 percent to 61 percent said the CRR.

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The study says that “Financial services firms need to acknowledge that existing reverse mortgages are often complicated and expensive and that the industry needs to develop innovative approaches to ensure that retirees have easy and efficient access to their equity.”

In addition, CCR says that protecting home equity for their kids may be a luxury that future retirees can ill afford as Social Security replaces a smaller share of pre-retirement incomes and people rely increasingly on meager 401(k) balances rather than on traditional pensions.

Fact Sheet: “The NRRI and the House”

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  • For some reason I can't view the other comments so excuse me if I am repeating others comments.
    The Boston College study is interesting in that it perceives reverse mortgages as a means to help baby boomers in their retirement. What bothers me is that it recommends taking the lump sum, and investing it in an annuity, something which HUD specifically advises against. I believe this will be a much more expensive route than taking payments for life.
    So the article in my opinion is good but offering incorrect advice.
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    • tishman,

      I do not believe that HUD advises against obtaining an annuity. It advises much caution about this investment. Some types of annuities are entirely inappropriate. There are separate costs with annuities that rack up a lot of upfront costs when combined with a HECM's upfront costs. There are generally penalties with an annuity for taking more cash than what is being paid monthly. Then there is the general inability to match annuity taxable income against HECM interest deductions. Then there are differences in payments due to interest rates, life expectancy issues, annuity payment options, spouse survival, and many other issues to consider.

      However, one main advantage of an annuity over HECM tenure payments is portability. Even if the senior no longer owns the home, the annuity payments will generally keep coming while the HECM tenure payments terminate.

      While an annuity MAY BE appropriate, many, many factors must be analyzed. Seniors should carefully consider before using HECM proceeds to acquire an annuity.

      Generally tenure payments are a better option but not always. It all depends….

  • While the study does a great job addressing issues that are critical to understanding the need for HECMs, it also promotes the false assumption that the financial services industries can adjust the HECM program to reduce complexities and costs. Here is a perfect opportunity for the industry to undue a misconception and to find out what specific changes this group is advocating.

    When the Research group talks about complexities are they addressing servicing fee set asides, FHA’s definition of non-recourse, covenants related to principal residence, or other topics? When it comes to costs are they referring to upfront costs or compounded interest? We know they have a problem with the structure of the program so why not proactively meet with them and address their concerns? Maybe NRMLA is doing just that but who knows?

    There is already a proactive movement afoot to address a lower upfront cost HECM, sometimes called HECM II. As part of one such proposal, servicing fee set asides would be eliminated. So since we are attempting to provide lower costs and fewer complexities, why not take credit for it and have them promote such changes? Some think it a waste of time but isn’t that why we have a MBA and NRMLA?

    The Research group also needs to see the problems we face at the federal and state levels. They might not be interested but then again until they are engaged in such discourse, who knows? If this group were given our situation, we might have an ally advocating relevant change through the proper channels. Why not try?

  • I stand corrected, however every loan application I have done includes a sheet entitled “Information regarding intent to purchase an annuity” It goes on to state that “this lender” does not require, arrange or recommends the purchase of annuity. It also references CA. senate bill 1609 which PROHIBITS the offering or referral of an annuity by the lender …as a condition of purchase.
    This would indicate a very strong negative against purchasing an annuity.

    Yes annuity proceeds are portable, and this may, in some cases, offer a better choice than an annuity, however my clients are stating that they intend to remain in their homes for the foreseeable future, even though we know that RM's on average do not last that many years.
    So if they have no intention of moving, why would they buy an annuity. The Center for Retirement at Boston College responded to my inquiring by stating that they were figuring a standard straight” annuity.
    <Ahref=”http://www.fhareversemortgagesofsouthflorida.com>reversemortgagessouthfloridaFHAhud

  • I stand corrected, however every loan application I have done includes a sheet entitled “Information regarding intent to purchase an annuity” It goes on to state that “this lender” does not require, arrange or recommends the purchase of annuity. It also references CA. senate bill 1609 which PROHIBITS the offering or referral of an annuity by the lender …as a condition of purchase.nThis would indicate a very strong negative against purchasing an annuity.nnYes annuity proceeds are portable, and this may, in some cases, offer a better choice than an annuity, however my clients are stating that they intend to remain in their homes for the foreseeable future, even though we know that RM’s on average do not last that many years.nSo if they have no intention of moving, why would they buy an annuity. The Center for Retirement at Boston College responded to my inquiring by stating that they were figuring a standard straight” annuity.nreversemortgagessouthfloridaFHAhudnn

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