The approach of retirement raises all sorts of considerations, including where a person will live.

The American College of Financial Services reported this week that 88% of respondents in a survey had thought about their retirement residence, and 83% wanted to remain in their current home.

Fifty-eight percent expected to stay in their home for more than 10 years, and 21% expected to remain there more than 20 years.

At the same time, only 19% said it was extremely important to leave their home as a legacy asset for their children or other heirs, while for 45%, this was not an important consideration.

The survey also explored how respondents planned to use home equity in retirement.

It showed that many people moving into retirement with some home equity did not fully understand reverse mortgages, including those who had reviewed reverse mortgages as a potential income source.

Greenwald & Associates conducted the online poll of 537 men and 466 women between the ages of 55 and 75 (60% over age 62), with at least $100,000 in investable assets and $100,000 in home equity. Among the respondents, 60% used a financial advisor, and 44% reported having a comprehensive written retirement plan.

Reverse Mortgage Basics

The survey’s author, Jamie Hopkins, co-director of the ACFS retirement income program, noted that a reverse mortgage, although not the right solution for every retiree, can diversify home equity, build in a non-market correlated source of income to help offset market and sequence of returns risk, be used to improve cash flow by turning off payments to a traditional mortgage and be used for tax efficiency purposes during retirement.

However, the survey showed that respondents had misapprehensions about many aspects of reverse mortgages. Researchers asked them true/false questions about basic aspects of reverse mortgages. The questions were created by ACFS professors and reviewed by industry experts to ensure accuracy.

About 70% of respondents failed the test.

Their two biggest misconceptions:

  • When should you use home equity in retirement: 27% correct. (Answer: early on to support a retirement plan rather than as last resort toward the end of retirement)
  • Do heirs have to repay the debt above and beyond the house value: 25% correct. (Answer: no)

What people understood:

  • They knew that a lump sum was not the only form of payment for a reverse mortgage: 71%
  • They knew that you could enter into a reverse mortgage before the house was fully paid off: 69%

Advisor Opportunity

Asked whether they had considered using home equity in retirement, 44% of survey participants said they had considered it, but this rose to 52% of those who had a written comprehensive retirement plan.

A mere 25% of respondents said they felt comfortable spending home equity in retirement. However, 63% who had considered a reverse mortgage said they were comfortable with the idea.

But only 14% of respondents said they had considered using a reverse mortgage as part of their retirement plan.

Forty-four percent of those who decided not to enter a reverse mortgage said they did not need one because of sufficient income, and 18% said they were too young.

Respondents generally did not consider a reverse mortgage a good tool for their retirement security. Only 10% strongly felt otherwise.

Hopkins pointed out that although having a written financial plan helped improve respondents’ knowledge, it did not increase their ability to consider reverse mortgages — nor did the existence of an advisor.

He said that although legacy goals appeared not to be a major roadblock for most people with regard to their housing decisions, for some people it would likely be a deal breaker as they want to live in place forever and leave the home to their children.

Financial advisors need to do a better job educating and talking to their clients about home equity as part of a retirement income plan, Hopkins said, and consumers need to better understand the features and uses of reverse mortgages.

— Check out Don’t Want a Mortgage in Retirement? Start Planning Now, Voya Survey Says on ThinkAdvisor.