The recession and subsequent housing crisis has been especially hard on older homeowners, forcing them to rethink how they will plan for retirement. The downturn took away jobs, forcing early retirement for some. The housing crash erased the home equity millions of homeowners spent decades building and threatens to limit the options retirees have when it comes to utilizing their homes to sustain their retirement.
We interviewed Dr. Harold R. Christensen, professor of economics at the Centenary College of Louisiana, and Dr. Michael J. McNamara, field distinguished professor of insurance at Washington State University, to help us explain what financial strategies retired homeowners can harness to maintain their standard of living throughout retirement. Is a reverse mortgage a viable option once again for older homeowners given recent home price gains? Our professors explain.
Q: Will retired Americans be forced to annuitize their assets in order to maintain pre-retirement standards of living?
We should expect to see continued increases in the use of various annuitization strategies as more “baby boomers” progress through retirement. Additionally, those who have not yet retired are much more likely to find themselves in defined contribution plans which leave them at the mercy of the vagaries of financial markets. Not all seniors have the freedom to control when retirement comes.
Given inadequate retirement savings, demographic trends and increasing price levels over time, many retired Americans will have to annuitize their real and financial assets to maintain their pre-retirement standard of living.
Q: What are the best ways that a senior can use their home to help fund retirement? Is a reverse mortgage a viable product?
For many retirees, home equity represents the largest asset that is held. However, they quickly realize that a house is not as liquid as a savings account, investment portfolio, or even an IRA. In many cases, equity can be liquidated by refinancing. The advantage of refinancing is that there may be a tax advantage in the payment of mortgage interest; the disadvantage is that payments must be made. For retirees that need a significant amount of cash to repair their home or other expenses and who have the income sufficient to keep up payments, refinancing is a reasonably good strategy.
For retirees that own their home but do not have the income to make regular payments (thus removing refinancing as an easy alternative), a reverse mortgages may provide the needed relief. The reverse mortgage carries the obvious advantage of having the mortgage company pay you rather than you pay them. Title remains with the homeowner and in most cases the existence of the mortgage does not impact Social Security or Medicare. In some states, eligibility for Medicaid may be impacted if too much equity is drawn out at one time. Reverse mortgages are also able to make monthly payments, serve as a line of credit, or make a lump sum payment. At death, the loan becomes due and becomes an obligation of the estate, so the heirs need to recognize what is involved.
In conclusion, a reverse mortgage is a viable product to assist in funding retirement.
A retiree can sell their home and use the proceeds to purchase a traditional life annuity. A reverse mortgage can also be used by retirees who want to continue to live in their home. There’s no “one-size-fits-all” solution for using home equity to assist with retirement. For some people, a reverse mortgage makes sense. However, some retirees prefer not to have the responsibilities that come along with ownership – painting walls, shoveling sidewalks, dealing with clogged pipes, etc. Some retirees may not have much equity in their home. In addition, some retirees may no longer be able to live in the their homes because of care needs (e.g. assisted living or rest home care).
