Unready For Retirement, Baby Boomers May Need To Tap Their Home Equity

With longer life expectancies and inadequate savings, more aging baby boomers may have to tap their home equity in retirement – whether they want to or not.

Retirees and those approaching retirement generally prefer not to access their home equity through reverse mortgages, home equity loans, or obtaining a new mortgage through refinancing, according to a new report from the Society of Actuaries (SOA).

The problem is that except for the most wealthy, Americans have two-thirds or more of their wealth stored in their homes.

“It is conceivable that the role of housing as a retirement asset will become more critical in the future,” the reported predicted

Only one in six retirees and one in five pre-retirees have already used or plan to use equity in their home to help finance their retirement, says the SOA report, Process of Planning and Personal Risk Management.

Out of those who plan to or already have accessed their home equity, most prefer selling their home (45 percent of retirees, 56 percent of pre-retirees). Less preferred options are:

• A home equity loan (20 percent of retirees, nine percent of pre-retirees),
• A reverse mortgage (12 percent of retirees, nine percent of pre-retirees),
• A new mortgage (five percent of retirees, zero percent of pre-retirees).

The report also found that 77 percent of retirees and 80 percent of pre-retirees have already or plan to completely pay off their mortgage.

Actuaries recommend paying off mortgages and owning homes outright to reduce retirement expenses. But for some, even a mortgage-less house is not affordable when taking into account total retirement expenses.

“While the value of residential properties has dipped considerably over recent years, investing in residential housing is still a viable option for some within a diversified portfolio,” said actuary Tom Herzog. “Individuals should consider using home equity as one of several tools in reaching a lifetime income to fund a rewarding and enjoyable retirement.”

The first wave of baby boomers is unprepared for retirement, with unrealistic expectations, inadequate savings and longer life expectancies, the actuaries warn. Only about a third will live comfortably in retirement. Another third will have little more than Social Security.

Some survey participants said they plan to retire at the same age as their parents did. They’ll be in for a big shock, the actuaries predict.

Many say they will working longer and don’t even plan to retire, but they’ll have to work hard to keep their job skills current.

“It is abundantly clear,” the report states, “that decisions as to when people intend to retire are not as carefully planned as they should be.”

Some baby boomers have already been forced into early retirements.

“Events such as a decline in personal health, needing to take care of a family member or, more recently, job loss related to the economic downturn,” the report states, “have caught many people by surprise, leading to the loss of earnings potential in their most critical pre-retirement years.”

The survey was conducted through telephone interviews of 804 adults age 45 to 80.