Study: Even With Reverse Mortgages, Many Unprepared for Retirement

A new study shows that about 20% of U.S. households overestimate their level of retirement comfort and more than half may not be able to maintain their standard of living — even when factoring in the potential proceeds from a reverse mortgage.

The Center for Retirement Research at Boston College on Tuesday released its most recent National Retirement Risk Index, which measures both households’ preparation for retirement and their self-assessed perceptions about retirement readiness. The BC researchers base the metric on the the Federal Reserve’s Survey of Consumer Finances, and also assume that the households have tapped into their home equity through a reverse mortgage when determining each household’s potential retirement comfort level.

Based on their research, the team determined that 52% of all households in 2013 — the most recent year for which data was available — were “at risk” of not maintaining their current lifestyles into retirement. That’s down a single percentage point from 2010, the last time the index was compiled, but up substantially from years past: In 1989, just 30% of households were at risk according to the NRRI. About two decades later in 2007, just prior to the mortgage crisis and recession, that figure sat at 44%.


BC’s team laid the blame on multiple factors, including the usual suspects of rising life expectancies, a static average retirement age, and public misunderstanding of 401(K) plans: Even though many Americans have money invested in one, the study points out that those approaching retirement had a median 401(k) or IRA balance of just $110,000 in 2013.

“In theory, 401(k) plans could provide adequate retirement income,” the team wrote. “But individuals make mistakes at every step along the way.”

The report also notes that persistently low interest rates have hamstrung Americans’ ability to earn passive income from the wealth they’ve built up over the years.

As for the question of perception versus reality, the BC team found that people have a surprisingly strong grasp of their own retirement futures: Almost 60% of households had a self-assessment that matched their projected outcome based on the NRRI, a figure that remains largely unchanged from 2004. Of the roughly 43% whose view doesn’t match the cold, hard figures, 24% were worried when they really didn’t have to be, while 19% remained unconcerned despite being classified as “at risk.”

The BC team said that those with 401(k) plans tended to “suffer from wealth illusion,” not realizing that the amount stashed away would be insufficient to weather the full length of retirement, while higher-income households may not fully understand just how much they need to save in order to enter retirement without any major adjustments to their lifestyles. The problem for wealth managers, reverse mortgage specialists, and other retirement planners, though, is that the group that needs the most help is unlikely to seek it.

“The 19 percent of households that do not recognize that they are at risk are unlikely to undertake remedial action,” the team wrote. “Perhaps better educational efforts could help here too, such as focusing more on the amount of retirement income that a given 401(k) could produce rather than the total account balance.”

Written by Alex Spanko

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