The reverse mortgage product is designed to offer seniors a way to tap into the equity they have built up in their homes, in some cases over a period of decades, in order to meet financial needs and obligations in later life. This is because of the nature of typical retirement income for most American seniors, which usually comes from things like Social Security benefit payments, specialized retirement accounts or investments.
Still, American seniors can often face a lot of risk in retirement if they have an insecure financial footing, which is why it can be important to take stock of a series of potential risks that could present themselves to financial stability. New research from Wenliang Hou, a quantitative analyst at Fidelity Investments and a former research economist, was published by the Boston College Center for Retirement Research. Hou compiled a list of five financial risks in retirement in order from most to least severe.
- Longevity risk
- Medical costs/health risks
- Stock market volatility
- Family expenses
- Social Security policy changes
Longevity risk has long been a risk that reverse mortgage professionals and other financial professionals have sought to highlight among potential clients, and ranks the highest because it affects the very nature of retirement planning, Hou explains.
“It is not surprising that longevity risk tops the list, because it affects the planning horizon for the retirement period,” Hou writes. “The result indicates that a person would be willing to give up 27% of his initial wealth to eliminate longevity risk. Interestingly, this value is close to the 30% suggested in the literature.”
Health risks and medical costs come in second because of the unpredictable nature of such things, particularly in later life, he says. Long-term care is a critical component of this, since the costs for such care tend to be very high relative to the financial means of many American seniors.
Market risk ranks third largely because a growing life expectancy for older people translates into a long “investment horizon,” Hou writes. Social Security policy changes rank last on this particular list because of the likelihood that such changes would affect seniors today.
“One big reason the policy risk is small is that Social Security reform is unlikely to have a significant impact on people who have already retired,” Hou writes.
Read the research brief at the Boston College CRR.