When looking at the field of study most closely associated with retirement in the United States, it can be frustrating to look at what is often an older person’s biggest potential asset when seeing that people are either unable or unwilling to tap into it in order to stabilize their financial situation on a fixed income.
This is the perspective shared by Dr. Geoffrey Sanzenbacher, associate professor of economics and a research fellow at the Center for Retirement Research (CRR) at Boston College. Appearing recently on an episode of the “Motley Fool Answers” podcast, Sanzenbacher describes the retirement landscape in America and touches briefly on the reverse mortgage sector: why people continue to be reticent to engage with it in spite of a series of positive changes made to it over the last several years, and how that culminates in a feeling of frustration.
When asked by co-host Robert Brokamp about the use of home equity in retirement when keeping in mind that “many Americans have more in home equity than they have saved in their 401K,” he said, Sanzenbacher described the home equity retirement landscape as a complicated one marred by years of mounting perceptions about the use of the home as a financial asset. Some of these perceptions are warranted, while other have become outdated, he explains.
“I think that it’s always worth noting, as much as we talk about the stock market and as important as that is for retirement, probably a third of workers have nothing in retirement accounts,” he says. “Probably another third don’t have that much, so their house is by far the biggest asset they have for retirement. You have a top third that maybe has a roughly equal amount on both. For that bottom really, 70%, the house is really important.”
There are three primary ways that a senior can employ the equity in their home for use in retirement, he says: downsizing into a new, more appropriate home for their more advanced age and pocketing the leftover profit, a reverse mortgage and a property tax deferral. Generally speaking, seniors are unwilling to take up any option, he says.
“[Downsizing] is somewhat uncommon,” he explains. “People are really attached to their house. I gave a talk in Newton Massachusetts. It was at a senior center. It was about these options, so one is downsizing, one is doing a reverse mortgage, and one is doing something called a property tax deferral, where you’re just basically using your home equity to pay your property taxes while you’re alive then when you sell the house, it gets paid off. People hated all these things, no one wanted to hear it. I’m not used to a hostile crowd, it was not a happy crowd.”
People are unwilling to sell their homes because of their emotional attachments to them, and people are usually unwilling to entertain the idea of getting a reverse mortgage because they simply don’t trust that industry, he says. While some of this mistrust is warranted, he opines, the reverse mortgage industry has also made a series of positive, notable strides in recent years including the addition of non-borrowing spouse (NBS) provisions.
“I think the industry is making strides, but people still don’t trust it,” he says. “Then the property tax deferral, a lot of times our income is restricted, so that’s a bit of a problem. It seems like a means tested program, and people don’t like that. Also, it is a lien against your house, and people don’t like it. People very rarely use any of these options, which is understandable but also frustrating as someone who sees that as the biggest store of wealth that the typical person has.”
Listen to the episode of the podcast at The Motley Fool.