Income planners might not be in the real estate business, but they still need to think about becoming become conversant with the ins and outs of homeownership from a retirement income perspective.
Two recently published studies shed light on this.
A study by Phoenix Companies Inc., Hartford, Conn., found that about 14% of U.S. residents with at least $1 million in net worth see the equity in their primary residence as a major part of their retirement savings. That is up from 10% in 2008 and 12% in 2007, researchers say. (See our report on this here)
That trend line says a lot about how home real estate is being reinvented–not just as something to sell or an asset to pass down but as a retirement income piggy bank.
In today’s economy, one might expect to see this shift in thinking among people of more modest means, but not among people with $1+ million in net worth.
An equally telling finding from the Phoenix study is that 41% of the survey group already have a home equity loan or line of credit, up from 34% in 2008, and 21% have home equity credit lines that have not yet been used, up from 8% last year.
Then, there is a report about homeownership among older people, age 62 and up, from MetLife Mature Market Institute, Westport, Conn., and the National Council on Aging, Washington. This study found that a “small but growing” number of older people are using their housing wealth earlier in retirement to maintain financial independence, rather than saving this asset as a last resort.
The MetLife/NationalCouncil study also found that some older homeowners are already beginning to tap their home equity “to ensure that they will have enough income to meet basic expenses.” (See our report on this here)
Findings like the ones above should be a signal to financial advisors–that they may need to start reevaluating the traditional notion that the client should never tap equity in the home unless there is a dire emergency.
More to the point, income planners need to consider if some of their clients can actually benefit from using lines of credit and reverse mortgages as a means to supplement or extend retirement income–and thus to keep dire need from ever arising.
The MetLife/NationalCouncil report–”Tapping Home Equity in Retirement: The MetLife Study on the Changing Role of Home Equity and Reverse Mortgages“–touches on that very point. For instance, in a several-page discussion on how seniors are looking to their homes to increase income security, the study notes the following:
…Baby Boomers who tap home equity during their working years will have less housing wealth left in retirement. These homeowners may be interested in targeted, short-term home loans that can help them defer Social Security payments or delay the liquidation of depressed equity. Such strategies highlight the new ways in which financial professionals are beginning to incorporate home equity as a retirement resource….(p. 16, emphasis added)
Examples in the MetLife/NationalCouncil report make it clear that arranging retirement income this way takes careful thought and financial analysis.
Advisors don’t have to rush right out and start doing such planning tomorrow. After all, it’s always possible that the housing market and the economy might recover.
Consider this: The National Association of Realtors, Chicago, says sales of existing homes in June 2009 rose by 3.6%, the first time the industry has experienced three straight months of gains in existing home sales since early 2004. If good news like that continues, it may dampen interest in using home equity for retirement planning.
However, financial planners should not shove the issue under the rug, either. The fact is, no one knows whether new home sales increases will continue and, if they do, whether this will impact the new role that older Americans are giving to home equity in the retirement years.
It could turn out that the entire U.S. economy recovers its heft in a few years but that older American homeowners still view their homes as piggy banks.
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-Linda Koco, Managing Editor, Products and Managing Editor, e-Publications
National Underwriter Life & Health