With retirement savings not nearly enough to live on, opting for a reverse mortgage almost becomes imperative.
America’s retirement savings news is grim.
Half of workers in the US are at risk of not maintaining their standard of living when they retire. Some 48 percent of those 55 to 64 don’t have a 401(k) or IRA and those who do only have $111,000 stashed away on average. That comes to $500 a month when it’s annuitized, according to research from the Center For Retirement Research at Boston College. When you factor it among the entire age group, the average household has $40,000 in retirement funds in 401(k) and IRAs.
That means people nearing retirement are either going to have to work longer or cut back on their lifestyle when they stop working. If they’re going to any kind of comfort in retirement, they’re either going to have to sell their home and downsize or take out a reverse mortgage.
“Our concern that $500 a month paired with your Social Security benefit is not going to be enough for many households to retain their pre-retirement standard of living,” says Andy Eschtruth, the communications director of the center that regularly reports on the state of American retirement. “We know that these households have very little money in financial assets outside of IRAs and a 401(k). You can’t save more because it’s too late for that for them. The only option is cutting back on consumption and changing your expectations of what kind of lifestyle you can have when you retire. Maybe, you won’t be able to do some things you hoped to do.”
The numbers are even worse because the Boston College researchers factor in people drawing from their home equity just to come up with the number that half of the workers are at risk of not maintaining their standard of living in retirement. Without income from a reverse mortgage or selling the homes to get a smaller one, the percentage is even greater.
“We think that they should definitely considering tapping into their home equity in retirement and a reverse mortgage is one way to do that,” Eschtruth says. “The general feeling of the research team at the center is that reverse mortgages is something that should get a more serious look from people because they aren’t going to find the resources in other places. They’re not going to have enough piecing together Social Security with their 401(k) savings. Looking at their home equity is a reasonable way for many people to maintain their standard of living in retirement.”
Eschtruth says that while many Americans have housing equity, they don’t tend to have reverse mortgages. It’s uncommon for people to secure because many are reluctant to do that.
Under a reverse mortgage the borrower, who must be at least 62, can tap into their home equity. The loan isn’t repaid until the borrower moves or dies.
“They want to leave their homes to their kids or hold it as an emergency asset,” Eschtruth says. “Some don’t like the idea of feeling like they’re back in debt because they spent their life paying off their mortgage. Our view is that a reverse mortgage is a big asset for many people and it’s going to be increasingly hard to ignore in retirement.”
The amount of income from 401(k) plans and IRAs at $111,000 for those 55-64 that have them is down from 2010, and Eschtruth says there’s no indication that trend is changing despite gains in the stock market. That group is in worse shape than those 65 to 74 that have $149,000 in 401(k) and IRA assets for their retirement, Eschtruth says. That group is also better off because they’re more likely to have traditional company pensions as well than younger generations that have had to rely on voluntary contributions matched by employers if they even offered a 401(k) plan.
“The news for today’s retirees is different than when people were retiring during the golden age when people had more traditional pensions—the golden age is certainly coming to an end,” Eschtruth says.
Eschtruth says the hope is that more companies will go into auto enrollment programs where workers are automatically signed up for 401(k) plans unless they opt out of them. Many people don’t have them simply because of inertia in that they don’t get around to doing it, he says. That translates into 20 percent of people with access to plans not signing up for them, he says.
“What we found through auto enrollment, if the decision is made by the company for you, you still get by on what you have,” Eschtruth says. “People tend to get by on what they have coming to them in their paycheck. They find they can save when they thought they couldn’t. “
Eschtruth says people need to realize that the world has shifted and it now places more risk and responsibility on them to prepare for their own retirement. Not everyone is getting that message.
“My concern is that people may not have fully realized that still and that the sooner they do the better because they’ll have to take some actions on their own to make sure their retirement will be what they’re anticipating it will be,” Eschtruth says. “What we’re concerned is people will get to retirement and find they’re not in the shape they thought they would be. They’ll realize that either they retired too early or they didn’t save enough.”