A large majority of retirees and pre-retirees know very little about reverse mortgages. Not surprisingly, this lack of knowledge is one of the main reasons why many people don’t seriously consider the use of home equity in retirement, recent research indicates.
The percentage of American workers who are confident they will be able to afford a comfortable retirement has increased over the years, from 13% in 2013 to 21% in 2016, according to the 26th Retirement Confidence Survey by the Employee Benefit Research Institute.
Despite this growing optimism, preparations to save for retirement are still lagging, with less than half of all workers (48%) reporting ever having tried to calculate how much savings they will need to live comfortably during retirement. Furthermore, EBRI also finds that roughly 40% of all workers simply guess at how much they will need to accumulate, rather than doing a systematic retirement needs calculation.
Building a comprehensive retirement income plan that incorporates all aspects of wealth will be critical for workers’ abilities to live in comfort during retirement. For many retirees, this means putting serious consideration into how home equity fits into the retirement planning equation.
Home equity can be a “big part” of a person’s retirement income plan, however, housing wealth has not been a focus for many financial advisers, says Jamie Hopkins, professor of taxation at The American College in Bryn Mawr, Pa.
“For somebody using a systematic withdrawal strategy in retirement, we can improve the 4% safe withdrawal rate if we include home equity in the plan and use it early on to help reduce sequence of returns risk, giving time for investable assets to grow,” Hopkins said, referring to using a reverse mortgage line of credit standby strategy.
For many older homeowners, the value of home equity outweighs other financial assets. The average household ages 65-74 holds an estimated $150,000 in home equity, whereas their financial assets total $125,000, according to the Boston College Center for Retirement Research.
The gap between home equity and financial assets only grows the older households are; reaching an average $160,000 in home equity and $115,000 in financial assets for households ages 75-84, and $150,000 worth of housing wealth among households age 85 and older compared to $100,000 in other assets.
“Home equity is a big asset, it cannot be ignored,” Hopkins said during a webcast this week, during which he revealed the results of a recent survey on home equity and retirement income planning.
Despite home equity representing a sizeable share of net worth, many retirees (and pre-retirees) have not yet realized the value of housing wealth for their retirement.
Of the 1,003 people ages 55-75 surveyed by the American College—each having at least $100,000 in investable assets and $100,000 in home equity—56% said they have not considered home equity in retirement.
While more than half of retirees and pre-retirees haven’t looked at housing wealth, far less (14%) have considered using a reverse mortgage as part of their retirement plan. Of this group, 17% of men reported having considered a reverse mortgage, compared to 12% of women.
Low consideration levels were correlated to the comfort levels of respondents and their willingness to tap into housing wealth for retirement. Only 25% said they felt comfortable spending home equity in retirement. Meanwhile 63% of those who considered a reverse mortgage felt comfortable spending their home equity.
When asked why they didn’t get a reverse mortgage, respondents cited various reasons—the main reason being they (44%) did not “need it” because of sufficient income, Hopkins noted.
Others cited being too young to become eligible for a reverse mortgage (18%), while some respondents said they were just not ready (10%); found a reverse mortgage too risky or not beneficial (9%); considering other options (6%); planning on moving (3%); and because they aren’t retired yet (3%).
Roughly one fifth of respondents (19%) stated they weren’t interested in using a reverse mortgage because they want to leave their home as a legacy to their children or other heirs. This legacy goal was less important for those who had considered a reverse mortgage and more important for those who had not, Hopkins noted.
Even though the survey results indicate a general lack of awareness and consideration for reverse mortgages in retirement, other areas of the survey suggest there is still hope for the product, considering 58% of respondents said they expect to remain in their homes for more than 10 years and 21% expect to spend more than 20 years in their homes.
People were more likely to consider using home equity in retirement, and that includes reverse mortgages, if they already had a retirement plan in place (52%) compared to respondents that didn’t have a retirement plan (38%).
“Having a plan opened up their eyes to other things they could look to and start considering different assets and strategies,” Hopkins said.
But as the same survey shows a vast misunderstanding of reverse mortgages continues to exist—with roughly 70% of respondents failing the literacy quiz portion—if nothing else, the results underpin the industry’s uphill battle to educate the masses on just where the reverse mortgage product fits into the retirement planning puzzle.
Written by Jason Oliva