As increasing longevity continues to stretch personal savings thin, a recent study suggests Americans will need to look beyond traditional funding sources if they want their retirement to last for the long haul.
Americans are living longer than ever before, yet many are still not taking the necessary steps to financially plan for their future, according to the 2016 Northwestern Mutual Planning & Progress Study. Out of more than 2,000 people aged 18 or older, only 21% say they have increased their savings in efforts to prepare for retirement, whereas 44% report having taken no steps at all.
The 2016 study, which Harris Poll conducted on behalf of Northwestern Mutual, explores the state of financial planning in the U.S. today, providing insights into the money behaviors and priorities of American adults.
Life expectancies continue to climb and that’s a good thing, however, Americans are increasingly less confident that their savings will last through retirement. Roughly two-thirds of survey respondents believe there is a chance they will outlive their savings, with 34% of this bunch saying the likelihood of this happening is 51% or better.
“The prospect of an extended retirement in an environment of diminishing safety nets makes it even more essential that your financial plan is flexible enough to stretch as long as needed,” said Rebekah Barsch, vice president of planning for Northwester Mutual, in a written statement.
The 2016 study results not only highlight the vast unpreparedness of American adults, but also underscores the need to look beyond traditional funding streams like Social Security to bolster retirement savings.
Just 24% of Americans believe it is “extremely likely” that Social Security will be available to them when they retire, according to the study results, compared to 52% who believe it is “somewhat likely” and 24% who say it isn’t likely at all.
Non-retirees also plan to rely upon Social Security less than their retired counterparts, with 35% of non-retired Americans expecting this benefit will be their sole or primary source of retirement income, compared to 49% of current retirees.
Social Security is often one of the main sources of income for people over age 65. But this stalwart asset, which has long been considered one of the three legs of the traditional retirement stool, may soon face depletion by 2034, according to the Security Board of Trustees for the Social Security Administration in a report submitted to Congress last summer.
But while there has been some talk that reverse mortgages could support the traditional retirement stool, joining Social Security and personal savings as defined benefit pensions become increasingly less common, the acceptance of using housing wealth as a retirement funding source is hobbled by a widespread apprehension to borrow against home equity.
Such reluctance can be largely attributed to a lack of education on how to strategically leverage home equity in a retirement income plan, coupled with a lack of understanding for the new consumer protections that have been enacted in recent years.
Of a total of 1,003 people between ages 55-75, roughly 70% failed a retirement income literacy quiz on reverse mortgages administered by The American College earlier this year. While more than half of these retirees and pre-retirees (56%) said they haven’t considered home equity use in retirement, far less (14%) admitted they have considered the idea of using a reverse mortgage to support their retirement.
Despite these attitudes, as longevity is expected to increase, more seniors may find themselves with insufficient savings to sustain their financial needs in retirement. This presents a plausible scenario that could lead to increased demand for reverse mortgages in the future, but it all starts with education.
View the 2016 Planning and Progress Study.
Written by Jason Oliva