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The lack of focus on home equity in retirement income planning is nothing short of a complete failure to properly plan and utilize all available retirement assets. This needs to change immediately because strategic uses of home equity, especially Reverse Mortgages, could save many people from financial failure in retirement and help stem overall retirement income crisis facing Americans.
Research by the Insured Retirement Institute reflects that 24% of baby boomers have no retirement savings – which is the lowest number recorded since the beginning of the study in 2011.
Another sobering data point shows only 55% of baby boomers have some retirement savings and, of those, 42% have less than $100,000. Thus, approximately half of retirees are, or will be, living off their Social Security benefits.
A major component of wealth and retirement planning often overlooked or ignored, is home equity. Based on U.S. Census Bureau figures, collected in 2011 and dated 2013 the average married couple entering retirement will have a net worth of $194,226. However, when home equity is removed net worth drops to just $43,921. With 77% of a retiree’s net worth locked in home equity it’s astonishing why so many financial planners ignore home equity when creating retirement plans. There is currently over $6.3 trillion in senior housing wealth and its growing daily as 10,000 people turn 62 every day. Although recent changes to the fiduciary standard do not explicitly include home wealth, it no longer can be ignored as part of the overall retirement plan.
Working with a well-versed financial adviser a reverse mortgage can be customized to meet or complement a number of retirement financial goals. These goals may include long-term care planning, purchasing the right house, improving cash flow, mitigating sequence of returns risk in market downturns, delaying other income streams, or simply providing peace of mind for unexpected expenditures.
For most over 62, housing costs are the single biggest expense throughout retirement. It’s an expense requiring careful planning and if left unchecked, can derail a retiree’s financial security. In 2014, the National Association of Realtors estimated over 700,000 homes were sold to seniors over the age of 62. About 60% were financed with a traditional mortgage with required monthly payments. Only a few thousand sold were financed with a home equity conversion mortgage, or HECM, for purchase. Most people are not aware that someone over 62 can purchase a home with the FHA approved HECM product commonly referred to as the “H4P.” Eliminating or making a mortgage payment optional throughout retirement cannot be underestimated as a valuable strategy.