The difficulty that the senior population has in finding an adequate amount of money to fund retirement is an issue that is only growing in scale, and the reverse mortgage industry needs to keep the unique hardships faced by seniors fully in mind when advising them on how best they can make ends meet.
This was a perspective shared by Dr. Eddie Seiler, VP of research and economic analysis at Dworbell, Inc., management company of the National Reverse Mortgage Lenders Association (NRMLA).
Dr. Seiler gave a presentation to reverse mortgage professionals in late March highlighting the state of the United States economy both at-large and from the perspective of seniors at the NRMLA Western Regional Meeting in Huntington Beach, Calif.
Shortly after his presentation, RMD sat down with Dr. Seiler to briefly unpack the economic issues faced by seniors, and what impediments exist for adequate retirement funding.
The limits of the ‘4 percent rule’
Many of the financial problems seniors face in retirement stem from the key source of wealth many share, Seiler says.
“For seniors aged 70-74, two-thirds of net worth is in their home equity,” Seiler says. “And their net worth is only about $200,000. If you go by the old 4 percent rule, a typical senior could only take around $4000 a year,” he said. “So, where can they get more money? If you think of a strategy for retirement, the ability to tap home equity is important.”
Even for those families who are well-invested, home equity could be an important tool should there be a market downturn.
“If we go into recession, they may draw a lot of money from the stock market,” Seiler says. “If they sell low, they may never be able to recover. However, if they can sell home equity, that could give them another leg to operate on.”
Limited retirement savings
Seniors who look at their full catalog of assets may often find that they simply don’t have enough assets to sustain them through a full retirement.
“55 percent of households have only $25,000 in retirement savings,” Seiler says. “A lot of retirees are looking at Social Security. A lot of them have a good idea of the income they have, and aren’t thinking about home equity because of stigma.”
While the reverse mortgage industry continues to try and find new ways to innovate the incorporation of home equity into sustainable retirement plans, Seiler finds optimism in both proprietary reverse mortgage products and other tools that have emerged that allow for the leveraging of home equity.
The promise of proprietary products, alternative equity tapping
“Now with proprietary products and other innovative products like equity sharing, there are going to be more tools out there,” Seiler says. “Especially as baby boomers age. As an industry, we have to be innovative and think of solutions that HECM products are not suitable for.”
In terms of shared equity products specifically, the fact that they make up a much smaller share of the home equity tapping space when compared directly with reverse mortgage products means that it will likely take them more time to gain steam among retirees.
“Shared equity products are smaller,” Seiler says. “What will get into peoples’ minds is if they can become more widely accepted by financial planners along with HECM and other reverse mortgage products.”
Read the details of Dr. Seiler’s presentation.