Two recent scholarly articles take a look at how Americans don’t always make the best pre-retirement decisions — and how they can adjust their outlook to incorporate home equity and other sources of cash for a more comfortable life in their later years.
First up: “The Power of Working Longer,” a January working paper from the National Bureau of Economic Research (NBER). A team of four researchers from the Cambridge, Mass.-based organization set out to determine the relative effects of pulling different retirement levers at varying times in a worker’s life.
For instance, the team examined the effects of working longer into one’s sixties, as well as saving more over the course of one’s career — all with an eye on delaying the receipt of Social Security benefits as long as possible. The researchers found that the simple act of working one more year than planned has more of an impact than saving an additional 1% of wages over the course of a 30-year career, but that’s only part of the equation.
“Our calculations show that working longer is only powerful if accompanied by deferring the commencement of Social Security and the annuitization of the accumulated 401(k) balance,” the group writes. A couple that works just one extra year to age 67, defers Social Security benefits, and annuitizes their defined benefit contribution balances can see an 7.75% increase in their standard of living once they retire, the researchers observe.
The findings could provide a new way of analyzing the emerging strategy of using a Home Equity Conversion Mortgage to delay receipt of Social Security benefits as long as possible in order to maximize their value. Proponents of the plan say that tapping home equity to cover expenses while waiting to maximize Social Security benefits presents a win-win for borrowers; critics, including the Consumer Financial Protection Bureau, say that the costs of originating a reverse mortgage outweigh the benefits of delaying.
The team from the NBER — which includes researchers Gila Bronshtein, Jason Scott, John B. Shoven, and Sita N. Slavov — also notes that workers who have delayed saving might have no choice but to continue working longer: The effect of increased retirement savings diminishes as time goes on and the money has less time to grow.
“Increasing retirement saving by one percentage point 10 years before retirement has the same impact on the sustainable retirement standard of living as working a single month longer,” the team notes.
In the report, researchers Wade Pfau, Joe Tomlinson, and Steve Vernon attempt to provide a resource for financial planners working with middle-income workers. They note that in the financial advisory field, some players may be less likely to recommend certain products based on their intrinsic biases: For instance, a planner with an insurance background may be partial to annuities, while a stock-focused advisor might push workers into a mutual fund or other equity.
While some may be wary to recommend them, reverse mortgages, have “legitimate uses” in retirement, the study authors conclude.
“A reverse mortgage should be one of the tools that retirees and their advisors consider on a case-by-case basis, using analyses to quantify how financial security can be improved by strategically employing reverse mortgages,” the three researchers write.
They recommend reverse mortgages for those retirees who want to stay in their homes for an extended period; the team also cautions that potential borrowers need to have a full understanding of the costs, which “can be considerable” for HECM products.
The team also analyzed various scenarios for a 65-year-old couple with $400,000 in retirement savings, along with a home — owned free and clear — valued at $350,000. Using a standby HECM line of credit, the couple can increase their accessible wealth by up to $265,956, while using a LOC for fixed tenure payments can boost average annual income up to $9,386.
Still, the group concludes that each individual’s mileage may vary when it comes to the reverse mortgage strategy in retirement.
“We caution readers against drawing general conclusions that reverse mortgages should be used broadly,” they write. “It’s best to use reverse mortgages when the retiree plans to stay in the house for the foreseeable future and can afford the costs for maintenance, insurance, and property taxes.”
Written by Alex Spanko