One of the cruel lessons people learned from the great housing bust was that the value of their homes won’t always go up.
But one of the residual effects of the housing crash, after expectations about home prices had been leveled out, is that many people have now undervalued the role that their home can play in retirement planning.
According to new analysis of the National Retirement Risk Index by the Center for Retirement Research at Boston College, the decision to not tap home equity through a reverse mortgage increases from 10% to 61% the level of those in danger of being unable to maintain their pre-retirement standard of living in retirement. The impact this has on placing households at risk is greater than the stock market crash, according to the CRR.
Even though the home remains such a crucial part of overall retirement savings, a reverse mortgage still remains the only way that people have to leverage their equity. One problem: Only 2% of those eligible have chosen a reverse mortgage, according to the CRR.
Brad Davis, a vice president of retirement income solutions for Nationwide Financial Services, which underwrote the CRR’s research, said convincing clients to tap their home equity during retirement has become tougher for financial advisers in the wake of the housing market crash.
“The housing bust makes it a really big challenge,” he said. “Historically, the previous generation was dead-set against ever using its house to fund retirement. They had robust pensions and Social Security and had survived the Depressions so they lived more frugally.”
But Baby Boomers have different lifestyle expectations in retirement, Davis said. They have pushed up consumption and lived at a higher lifestyle. And while they have earned higher wealth accumulation, pensions are evaporating and the sustainability of Social Security is questionable, he said.
“What people don’t think about is that a significant portion of the household savings is in the household itself,” Davis said. “Knowledge and understanding continues to be low, but also reverse mortgages have gotten a bad rap. A behavior change has to happen on both the client’s and advisor’s part.”
Davis said Nationwide has underwritten CRR’s analysis and research “to get the word out and elevate the discussion and get it on the radar and think about it more critically.”