A recent research paper by the Retirement Research Center at the Defined Contribution Institutional Investment Association details that while half of American workers are concerned about their ability to save for retirement, most Americans who are already retired tend to feel reasonably well about the state of their retirement finances. The research attempted to discern why this is the case, according to a new column at Forbes.
“[W]hile less than one in five households went into retirement with enough wealth to completely cover their expected levels of consumption in retirement, almost 50% will have enough to finance their actual retirement spending after 10 years of retirement,” the column reads. Part of this is because “people dramatically cut their spending when they enter retirement, which then brings their retirement spending levels in line with their real amounts of assets,” according to the column based on the assertions of the paper.
Be that as it may, for those retirees who do feel insecure about their retirement finances, many appear unable or unwilling to tap their home equity in order to make ends meet during their post-working lives. The potential reasoning behind this comes down to the perceived intrinsic personal value of a retiree’s home, combined with a perception of high costs associated with equity tapping options or a simple lack of awareness about such options, according to David Blanchett, head of retirement research at Morningstar, and a co-author on the cited study.
“Homes are the asset of last resort,” Blanchett says. “There are simple ways to access the equity in your home, like a home equity line of credit. But there’s a huge lack of desire among Americans to tap their home equity, making it an underutilized asset for retirement. Why is that? Some people might not know about the available home equity options while others might think they’re too expensive. Some may want to preserve their home to fund health spending later in life or pass it on to their kids.”
The home is still an asset that can be used to create cash-flow in Blanchett’s mind, he says. Some of what does fuel actual tapping of home equity is the perception of a high costs associated with healthcare spending late in life, but that is not a universal truth for every retiree, Blanchett says.
“Most health care spending in retirement is basically your Medicare premiums,” he says. “You know how much it will cost beforehand. The trouble is tail risk. Most people aren’t going to have a very expensive extended stay in a nursing home. Of course the longer you live, the higher the odds it could happen to you. But healthcare isn’t that big a deal as an unexpected source of expenses for most American retirees. But for some, it can be devastating. This is something you should be able to cover with insurance, but long-term care insurance is really expensive and not always available.”
This leads to some retirees looking to their home’s equity to fill such a gap, or to try and get their kids to save for such expenses, Blanchett says.