Retirement Research: Don’t Let Reverse Mortgages Fly Under the Radar

A research brief released this week from the Boston College Center for retirement research presents a simple message on nearing retirement: worry less about asset allocation and look to other, more effective tools including reverse mortgages.

“The traditional emphasis on the importance of asset allocation might lead one to believe that the best way to improve retirement security is to adopt the perfect mix of stocks and bonds,” write the brief authors. “However, households nearing retirement have more effective levers available that tend to fly under the radar: delaying retirement, taking a reverse mortgage, and controlling spending.”

These present more “potent” alternatives than asset allocation for most households, the brief finds.

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In terms of home equity, the typical U.S. household has about $140,000 in home equity, making it the largest asset outside of social security, according to the research. Yet few seniors tap their equity to help support their retirement consumption, it says.

Often the work of financial planners, while they spend considerable time and energy advising on investment of savings, can be lost on the average household, which simply lacks adequate savings, the Boston College research notes.

“Fortunately, people have a number of other levers that can affect their retirement security,” the brief writes. “And these strategies – unlike the stock market – are within the individual’s control: working longer, using a reverse mortgage to access home equity, and controlling consumption when the kids leave home. Moreover, even for many with substantial assets, these non-financial levers may be as powerful as asset allocation in attaining retirement security.”

View the full study brief.

Written by Elizabeth Ecker

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  • Although the summary above is good, the initial conclusions of the actual Brief (an adaptation from a longer, recent report) are very good.  Even if you do not have the time to read the Brief, the opening summary is well worth the read.

    Many times, the quality and findings of the reports from the Center appear biased and without much support.  This was NOT propaganda but a well thought out presentation about what most (the less affluent) younger seniors contemplating retirement should consider when it comes to financial security.

    First in importance was simply when optional, work longer.  With no risk, Social Security benefits can be increased by not only delaying the taking of benefits but also by possibly increasing the covered wages (not presented in the Brief).  It allows for more contributions to retirement plans, and it also means retirement assets have a shorter period over which they will be needed.  Not covered in the Brief is the possible impact on medical costs and other employee benefits.

    Second were reverse mortgages and last controlling (i.e., reducing where possible) spending.  The order of these two was very odd since the researchers were adamant that seniors need to reduce spending in their fifties so that they have more to contribute to retirement saving such as 401(k) plans and since reverse mortgages are not available currently until 62, it would seem controlling costs would come before reverse mortgages.

    A huge hole in this and other similar articles is Social Security benefits election planning.  Significant percentages of those who have engaged a competent advisor have increased their potential payouts by $100,000 to $200,000 over their life expectancy.  Too many seniors do not know their options and end up doing what “everyone” does simply because Social Security employees are not permitted to advise on the best alternatives for beneficiaries. Seniors should not sell this valuable service short.

  • Liz,

    The brief discusses $140K in home equity, not home value.  However, I prefer using the term “$140K of market value in home equity.”

    Some of the silliest ideas discussed today are how a home is worthless to a homeowner who is underwater.  On a nonrecourse mortgage, that person still owns the home and as long as that person is living rent free in that house, that person is experiencing the value of home ownership despite being underwater.  And what happens if that person can survive through the situation and begins to see positive market value on that equity?

    Market value is a fleeting thing but real home equity is not.  Even when the market value of home equity may be negative, the value of that equity to the homeowner may be very significant.  It all depends. 

  • Critic,
    Thank you for that note. I think your terminology makes sense and I adapted the article to reflect the “equity” noted, not home value. 
    liz

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