WSJ: Using Home Equity for Retirement May Become Necessary for Many

A recent Wall Street Journal consumer finance column addresses the issue of using home equity for retirement.

The column, “Tapping Home Equity In Retirement,” begins by noting that while most people would prefer not to use home equity for retirement, “given the state of retirement savings in the U.S., they may not have a choice.”

The column cites data from a recent Society of Actuaries report finding that “People, in general, look at their house as an anchoring point,” and, “There’s a resistance to leaving a house and considering alternative ways of using their home equity.”

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Among the ways people plan to use their home equity are reverse mortgages. While selling a home or downsizing and home equity loans are the more popular options, 12% of retirees and 9% of pre-retirees who plan to use their equity in retirement said they’d do so via a reverse mortgage, according to the Society of Actuaries report.

Barbara Stucki, vice president for home-equity initiatives at the National Council on Aging, is quoted in the article as saying, “I absolutely believe with a shift from defined-benefit plans to the 401(k)s…people aren’t saving enough.”

“It’s not a question of ‘if’; it’s more a question of ‘when’ and ‘how,'” Stucki told the WSJ.

The article also covers the recent lawsuit filed by AARP against the Department of Housing and Urban Development. “The lawsuit focuses on rules regarding the rights of surviving spouses when the reverse-mortgage borrower dies, if that surviving spouse isn’t on the home’s title. The suit’s outcome will determine whether surviving spouses who are in that situation are required to repay the full loan balance in order to remain in the home—even if the balance is higher than the home’s current value,” the article says.

“I suspect these situations are very rare,” Stucki said.

Overall strategy is advised, ultimately.

“What this tells people to think about is not just the front end, how much it costs. You also need to be thinking about an end strategy,” Stucki told WSJ.

Read the WSJ article.

Written by Elizabeth Ecker

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  • Over the last four decades it has been fascinating to watch the social responsibility of employers in private industry go from some responsibility for employee retirement to almost none other than providing a retirement vehicle to help employees provide their own retirement. Private sector employees foolishly traded defined benefit plans for defined contribution plans (“DCP”) with little, if any, employer contributions into the DCPs.

    The seduction to make those moves was investment gains in the retirement plan portfolios. Most of us saw that seduction in the movie Wall Street when it came to Bluestar Airlines. Bud Fox presented the $75 million of overfunding in their defined benefit retirement plan as the plum to Gordon Gecko.

    As employees began to realize that investment gains in old style defined benefit plans belonged to the employer and not to them, they saw the same plum. They thought they could capture that plum if they simply could get the right retirement plan. So they began appealing for and getting an exchange of plans with little or no funding in that exchange. They thought they could save but few did. Those who saved did obtain huge returns in the dot com market. But just as the market giveth, it taketh away. Some wise plan participants were able to shift investments in time to keep what they had made (or most of it) while others sat and watched the values of their plan assets plummet. Some retirees came and asked if they could write off the difference of what they had invested into their 401(k)s versus their value at retirement. Sadly the answer was and is no.

    The lesson is this. Per the NRMLA Convention last week, we will see a marketing effort by one lender to justify using reverse mortgages, particularly adjustable rate Savers, as the means to provide cash in retirement while allowing portfolios and retirement plan assets to grow (or recover). There will be stats and charts with college professors proclaiming the wisdom of not touching plan or portfolio assets in the first few years of retirement. In other words do not take money from other assets to live on, live on your house strategically for the first few years following retirement.

    While the strategy may work for some, it is very seductive and is a form of leveraged portfolio and retirement plan investing. The real question is whether reverse mortgage originators are qualified to give such advice. What if some young retirees want to use a reverse mortgage to invest based on this advice. The rule of thumb is that risk based investing should diminish with age. The headline risk on this one is immense. One problem could bring an avalanche of retribution.

  • Over the last four decades it has been fascinating to watch the social responsibility of employers in private industry go from some responsibility for employee retirement to almost none other than providing a retirement vehicle to help employees provide their own retirement. Private sector employees foolishly traded defined benefit plans for defined contribution plans (“DCP”) with little, if any, employer contributions into the DCPs.

    The seduction to make those moves was investment gains in the retirement plan portfolios. Most of us saw that seduction in the movie Wall Street when it came to Bluestar Airlines. Bud Fox presented the $75 million of overfunding in their defined benefit retirement plan as the plum to Gordon Gecko.

    As employees began to realize that investment gains in old style defined benefit plans belonged to the employer and not to them, they saw the same plum. They thought they could capture that plum if they simply could get the right retirement plan. So they began appealing for and getting an exchange of plans with little or no funding in that exchange. They thought they could save but few did. Those who saved did obtain huge returns in the dot com market. But just as the market giveth, it taketh away. Some wise plan participants were able to shift investments in time to keep what they had made (or most of it) while others sat and watched the values of their plan assets plummet. Some retirees came and asked if they could write off the difference of what they had invested into their 401(k)s versus their value at retirement. Sadly the answer was and is no.

    The lesson is this. Per the NRMLA Convention last week, we will see a marketing effort by one lender to justify using reverse mortgages, particularly adjustable rate Savers, as the means to provide cash in retirement while allowing portfolios and retirement plan assets to grow (or recover). There will be stats and charts with college professors proclaiming the wisdom of not touching plan or portfolio assets in the first few years of retirement. In other words do not take money from other assets to live on, live on your house strategically for the first few years following retirement.

    While the strategy may work for some, it is very seductive and is a form of leveraged portfolio and retirement plan investing. The real question is whether reverse mortgage originators are qualified to give such advice. What if some young retirees want to use a reverse mortgage to invest based on this advice. The rule of thumb is that risk based investing should diminish with age. The headline risk on this one is immense. One problem could bring an avalanche of retribution.

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