Many financial inventions have emerged over the history of the world, including pensions, mutual funds, bonds, life insurance, annuities, thirty-year mortgages, etc. Some have passed with no lasting impact, a number were specialized and not easily accessible to the masses, and others are so new that the jury is still out.
However, Reverse mortgages are now thirty years old. They have passed the test of time, left a lasting impact and have become easily accessible to the retirement masses. How did they begin?
They’re Older than You Think.
Equity release programs for seniors have been in existence for more than 100 years. After starting in England, they spread to numerous countries including Scotland, Ireland, China, Singapore, Australia, Indonesia, and Canada. Regardless of the location in the world you find them, the basic premise has always been the same: Help an aging population sustain a longer retirement.
Across the globe, the home served as the largest financial asset for most retirees, but the means of accessing its value to enhance retirement outcomes was limited. One option was to sell the home, take out the cash and move. The other option was the traditional home equity loan with its monthly payments. Both choices have value, but they didn’t always meet the needs of the majority of retirees. The overwhelming consensus was that most retirees want to stay in their own homes and don’t want payments in their later years.
Enter the equity release program—a way to convert the home asset into retirement income. No moving or mandatory monthly payments involved. In the United States, these programs are called reverse mortgages, and there are three types that exist today:
- Private Reverse Mortgages. These began in the United States in 1961.
- Jumbo Reverse Mortgages. These are private equity release programs for higher-value or second homes. Typically, homes that benefit most from these are worth $1.2 million or more.
- The Home Equity Conversion Mortgage (HECM). In existence since 1988, these reverse mortgages are overseen by the United States Department of Housing (HUD) and are insured by the Federal Housing Administration (FHA). Today, nearly 95 percent of all reverse mortgages are HECMs.
Why Is the HECM More Important Than Ever?
You guessed it–Baby Boomers. If there’s one generation in recent history that has most dramatically changed the retirement planning game, it’s the baby boomers. They’re one of the most talked-about generations today, with a host of well-documented challenges facing them. Three overarching themes stand out in particular:
- They will live longer than previous generations.
Instead of spanning fifteen or twenty years, their retirement will last twenty-five, thirty, or even thirty-five years or more. A longer retirement necessitates additional funding; add inflation and global economic uncertainty to the mix, and you’ve got one expensive quarter century to plan for.
- They will carry more consumer debt into retirement than previous generations. Much of the boomers’ money in retirement will be tied up in debt they accumulated during their working years. Someone once said a boomer never met a credit card they didn’t like. This can be especially problematic when retirees move to a fixed income.
- They have not saved enough money to sustain their retirement needs.
This is the most talked-about fact of all: that the majority of baby boomers have not saved enough to sustain retirement income for their projected lifespan. Even an attempt to increase saving in the years leading up to retirement will not make up for the compounding interest that could have been earned over the course of their careers.
The boomer generation is struggling to prepare for retirement and will continue to do so over the next 15 years (until all in generation reach retirement age), but there is one significant, redeeming factor among the majority of Boomers.
Recent surveys say that 87% of boomers and existing retirees own their home. In addition, the U.S. Census Bureau states that the average retiring sixty-five-year-old couple will have 68% of their total wealth tied up in their home equity. For most, that nearly doubles their amount of assets.
Simply stated, the average boomer is living in their biggest asset and most significant source of their total wealth. In the context of the current savings and longevity crisis plus more than $6 trillion in accessible senior home equity, doesn’t integrating housing wealth into a retirement income plan just make sense?
Housing wealth as my friend, Dr. Sandy Timmerman, founder of the Met Life Mature Market Institute, says, “will become the Boomers’ Salvation!”
So here’s to you, Reverse Mortgages. No longer in obscurity, you have survived the test of time and your best days are yet to come. – dg