Reverse Mortgages: Giving Retirees More Flexibility

From the start of our working lives, we work towards a secure and comfortable retirement. We contribute to our Social Security and 401(k), save judiciously, and pay off our mortgages in the hope of being worry-free in our golden years. Unfortunately, life can get in the way of best-laid plans, and many people find themselves unprepared for retirement.

An Uncertain Future

For the last of the baby boomers generation born in 1964, the normal retirement age in the United States is 67. However, many older Americans have found themselves being forced to retire earlier than expected following the onset of the Covid-19 pandemic. Meanwhile, others have had to dip into their retirement savings to make up for furloughs and decreased work hours. According to a report from the National Institute for Retirement Security, the pandemic resulted in more than a third of Americans experiencing a change in employment that brought negative financial impacts. A further two-thirds of Americans now plan to retire later than expected to mitigate the effect of the pandemic. 

It is commonly accepted that the average person needs over a million dollars saved for their retirement, although the actual amount varies widely depending on expenditure and life expectancy. Data from the Bureau of Labor Statistics shows that the average annual expenditure of an older household is $49,279, a manageable amount for those earning a wage, but a considerable sum for retirees. With the average life expectancy of Americans at 77 years, the sufficiency of retirement savings is a legitimate source of concern. In fact, more than half of Americans fear that they will not be able to attain a financially secure retirement. The rising costs of basic goods and services, the significant costs of medical care, stagnant wages, and lack of access to pension funds add to these worries.

Bricks and Mortar

The baby boomers had a clear advantage over the generations that followed them. They were born into an era of economic optimism and growth, with the post-war suburban expansion and improved building methods making it more affordable to own a home. The home became the focal center of the family, incorporating features such as the ‘family room’ and bedrooms for guests and grandchildren. While it is typical for older people to downsize upon retirement, the majority of boomers prefer to age in place, choosing to live out their years in their familiar and cozy family homes.

Baby boomers are thought to own 44 percent of homes in the US, dominating the homeownership market. At the same time, a survey by the Insured Retirement Institute found that 45 percent of boomers do not have any retirement savings and expect to live off of their Social Security benefits. This house-rich yet cash-poor group of Americans now faces the challenge of retirement in a world of escalating expenses. With the estimated average Social Security benefit weighing in at a mere $1,543 a month, some retirees are struggling to cope.

On My Own Terms

The independent and driven baby boomers want to live life on their own terms. While having limited savings can put a dampener on retirement expectations, boomers possess strong leverage in the form of home equity. Reverse mortgages allow retirees to access a portion of their home equity and forgo monthly mortgage payments. Much like the opposite of a mortgage, lenders of a reverse mortgage pay homeowners various sums of money equivalent to the borrowing valuation of their home. These proceeds can be received in the form of term or tenure payments, lump-sum payouts, or the popular line of credit.

When a reverse mortgage loan has been taken out on a home, retirees need not worry about making any monthly mortgage payments. Best of all, they can age in place and continue living in their family home. No payment is required on the loan until the homeowner or spouse moves, passes away, or sells the home. By adopting a reverse mortgage, retirees can obtain more funds to supplement their monthly budget. They can also gain access to a line of credit available to draw on for home improvement or medical expenses. Some people even use reverse mortgages to purchase a second property. That said, there are pros and cons to every financial product and retirees should do their research before signing on the dotted line.

Retirement is meant to be a time of relaxation, where older people get to pursue their hobbies and interests and enjoy the finer things in life. Sadly, without access to adequate financial support, many of them are now looking to return to the workforce. Choosing to have an active retirement is one thing but being obliged to work in your elderly years is unnecessary stress. By converting trapped home equity into flexible cash flow options, reverse mortgages can be a helpful tool that gives Americans the freedom to decide how to spend their retirement.