The notion of ‘golden years’ is a relatively new phenomenon
by Chris Moschner
Mr. Moschner is the Chief Marketing Officer at Finance of America Companies. Visit https://www.financeofamerica.com/.Less than four months in office, James A. Garfield lay in a railway station, clinging to life. On July 2, 1881, an embittered office seeker had fired two shots at the 20th U.S. president, and the second bullet lodged in his back. Garfield died 79 days later, the official cause of death a ruptured artery, following sepsis and bronchial pneumonia.
Yet most medical experts believe today that Garfield would have survived his wounds had his doctors been more aware of the science of the day. Indeed, Garfield’s assassin, Charles Guiteau, claimed in court that, “The doctors killed Garfield, I just shot him.”1
Guiteau had a point. Medical breakthroughs filled the previous century, led by the 1795 discovery of a vaccine for smallpox, which had killed 60 million people in the 18th century alone. Other medical advancements followed, like the invention of the stethoscope in 1816, the first blood transfusion in 1818, and the first use of anesthesia in 1846. The first antiseptic surgery took place in 1865, but the practice didn’t catch on immediately because many doctors mocked the idea of invisible germs causing deadly infections.
Sadly, the accidental discovery of x-rays didn’t occur until 1895, which could have easily pinpointed the location of Garfield’s fatal bullet and spared the president from his doctors’ probing, unwashed fingers.
New Longevity
With medical inventions occurring at breakneck speed throughout the 19th century, life expectancy, at a virtual standstill for 10,000 years, soared, from about 20-30 years in 1820 to about 79 years today.2
Perhaps, the amazing array of lifesaving interventions taking place today in U.S. hospital ER rooms (an average of 136 million visits a year3) best illustrates this new longevity. Combined with better medicines and treatments and more education on the benefits of a healthy diet, frequent exercise, and regular medical checkups, it’s no wonder 65-year-olds can now expect to live another 20 years, on average, with a third reaching 90.4
This new longevity, however, has also given birth to a set of unintended consequences, one of which we call retirement. For thousands of years and countless generations, it was hardwired into our brains that we would be born, find a mate in our late teens, have children, raise them to the tender age of self-sufficiency, and then die. The notion of retiring – ceasing to work after reaching a certain age – simply wasn’t part of life’s calculus.
But it is now. The diagnosis is as clear as a PET-scan. Today, millions of people in the U.S. need a retirement plan as robust and as vigorous as all the medical advances extending their lives. For a select few, retirement is truly a period of bliss, a place that sits between heaven and earth. But for an overwhelming majority, the concept of a secure retirement is becoming increasingly out of reach.
The good news (if one can even call it that), is that people in the U.S. finally appear to be recognizing the magnitude of the retirement emergency they face. In a February 23 AAG survey of more than 1,500 participants, ages 60-75, 89% said they believe the U.S. is experiencing a retirement savings crisis, with 43% rating their ability to save “fair or poor.”5
So, what is driving this trend and, more importantly, what can be done about it? There are several converging economic trends that have contributed to the current retirement savings crisis.
Pensions
In the private sector today, only 14% of Americans have access to a defined benefit plan or pension compared to about 60% in the 1980s.6 “With little fanfare,” said Martin Bailey, a senior fellow at the Brookings Institution, “America has moved from a world of traditional pensions, where risks were absorbed by employers, to a system of individual accounts where families must manage uncertainty … .”7
Limited Savings and 401(k) balances
Currently, 36% of Americans have absolutely no savings and 19% have less than $1,000 saved.8 Given the data, the Employee Benefit Research Institute estimated the retirement savings deficit to be $3.68 trillion, meaning all U.S. households (head of household age 35-64) have $3.68 trillion less in savings for retirement than they need.9
Furthermore, the average balance in a 401(k) plan, designed to replace the pension, tumbled 20.5% in 2022, reducing employee nest eggs to $103,900.10 Of the 68% of private workers having access to a plan, 17% didn’t participate at all.11
Social Security and Medicare Uncertainty
These two social insurance programs are extremely fragile. The Social Security trust fund could run out of money in 2033,12 while the Medicare hospital fund could run out in 2028.13 “Older Americans can now add policy uncertainty to their lists of risks to retirement,” Bailey noted.7
Inflation
In 2022, inflation hit 6.5%.14 At that rate, using the rule of 72 to roughly calculate how long it takes prices or savings to double (divide 72 by the percent), retirees will need to double their income in 11 years (72/6.5 = 11) if they wish to maintain their current lifestyle.
Market Uncertainty
Since 1926, the S&P 500 has returned an average of 10.13% a year.15 Over that same period, the dollar had an average inflation of 2.96%.16
Yet, every investment disclaimer warns, “Past performance is no guarantee of future results,” a fitting caveat since the S&P 500 lost 19.44% in 2022.17 Meanwhile, 2022 was the worst year on record for long-term U.S. government bonds, which lost 39.2% last year.18 Further disruption or destruction to markets, not to mention benefits programs, could result if the United States doesn’t deal with the debt ceiling crisis, which, at $31.4 trillion, was hit on Jan. 19, 2023.19
The Antidote
Stunningly, there’s another alternative to increase retirement cash flow that gets far too little attention, and that’s a reverse mortgage. With a reverse mortgage, homeowners can tap some of their home’s equity while they continue living in their home without ever making another monthly mortgage payment. This is possible because a reverse, per the loan requirement, first pays off the homeowner’s current mortgage (if one exists). The borrower can then select a payout option for any remaining available funds. Homeowners are still responsible for covering home maintenance expenses, paying their property taxes and homeowners insurance, and complying with all loan terms.
Today, about 80% of people over 65 in the U.S. own a home.20 Their average home equity is more than $300,000, the highest of all population sectors.21 Collectively, older homeowners enjoy a record $11.8 trillion in home equity.22 This wealth is more than three times greater than America’s retirement savings deficit.9
Asking why seniors should consider using their homes as an asset to help fund their retirement is like asking Willie Sutton why he robbed banks. It’s where the money is. No other asset class comes close. Yet, fewer than 2% of retirees have taken advantage of this growing retirement asset.23
Overcoming this reluctance has been extremely frustrating to the reverse mortgage industry.
When reverse mortgages were introduced more than 60 years ago, the industry suffered some early stumbles, losing control of its own narrative. For example, if the borrowing spouse moved out or passed away, the non-borrowing spouse had to pay off the note or leave the home. Other borrowers found they couldn’t pay their taxes and faced foreclosure because they had gone through all their cash the first year. Eventually, the industry corrected these oversights with spousal protections, first-year draw limits, counseling, financial assessments, and other consumer safeguards, including escrow-type, set-aside accounts to ensure ongoing payments of property taxes and insurance.
Are Reverse Mortgages Expensive?
Early on, reverse mortgages were branded as expensive, a perception the annuity industry also fights. But expensive relative to what? No financial service or product is without expense — you pay premiums for insurance, options contracts, real estate commissions, stock market commissions, and so on. So, the better question is, what price would a retiree pay to significantly increase their cash flow and preserve their retirement from volatility risk?
You have volatility preservation because the monthly cash payout from a reverse mortgage never changes, whether borrowers select a term plan (finite period of months), modified term plan (includes a line of credit), tenure plan (for life), or modified tenure plan (includes a line of credit). These plans are available so long as the borrower does not default on the loan. The borrower must maintain the home as the principal residence, pay all property taxes, maintain the home, and comply with all loan terms. With modified plans, the lender will set aside a specific amount of money for a line of credit.
And if borrowers select a line of credit, the most popular reverse mortgage payment option, the line can never be frozen, withdrawn, or reduced, even if the home’s value falls to zero. All these options are contingent on borrowers maintaining the home, paying property taxes and homeowners insurance, and complying with all the loan terms.
It’s also notable that although an FHA-backed reverse mortgage isn’t an insurance product, it offers insurance protection. When the borrower sells, moves permanently, passes away, or fails to comply with loan terms, borrowers or their heirs must pay off the loan. However, if the loan balance exceeds the home’s sale price, borrowers are only responsible for the amount their home sells for. FHA insurance, which borrowers help pay for through premiums factored into the cost of the loan, makes up the difference. FHA insurance also ensures that borrowers receive their stream of payments if the lender goes bankrupt.
Ultimately, the consumer must decide if this protection and peace of mind are worth the cost. What is the value of knowing you have a ready source of cash on hand, should your personal finances or the greater economy hit a rough patch? For instance, San Diego Gas and Electric customers saw their gas bills more than double from $105 in January 2022 to $225 in January 2023.24 What if that extra money wasn’t in the budget? Do you pay with a credit card, and hope you can pay it off?
Not only could a reverse mortgage immediately improve cash flow by paying off the homeowner’s current mortgage, a requirement of the loan, and providing additional monthly payments, with sufficient equity, it could also serve as a pro-active and long-term planning tool for maximizing retirement. Savvy and strategic uses include reducing capital gains exposure (It’s recommended for loan borrowers to consult with their tax advisors), minimizing sequence of returns risk, choosing the optimal time to begin taking Social Security, and improving asset diversification to reduce portfolio volatility.
President Garfield may have survived his injuries if only his doctors had adopted and applied the science of the day. Similarly, retiring comfortably today may require innovative approaches beyond the pensions, social programs, and other traditional resources that once served to sustain a long and healthy retirement. Could these new retirement assets include a widening spectrum of tools like annuities or reverse mortgages? It’s time to start that discussion.
Sources
1 The Chilling Story Of Charles Guiteau, The Man Who Killed James Garfield (allthatsinteresting.com)
2 Animation: The World’s Rapid Rise in Life Expectancy, in Just 13 Seconds (visualcapitalist.com)
3 Emergency Room Visit Statistics | The Emergency Center | ER
4 How Living Longer Will Impact Your Retirement (usnews.com)
5 Nearly 90% of Seniors Think the United States is Experiencing a Retirement Savings Crisis (prnewswire.com)
6 2 Reasons Companies Don’t Offer Pensions Anymore (fool.com)
7 Retirement nest egg isn’t enough for many people, expert says – Reverse Mortgage Daily
8 Americans Do Not Have Enough Savings. Here’s What You Can Do About It | Nasdaq
9 ebri_spending_facts-and-figures_112922.pdf
10 Fidelity: 401(k) millionaires have plunged by a third – CBS News
11 Why 17% of employees don’t participate in 401(k) plans | BenefitsPRO
12 Major Social Security trust funds could be tapped out by 2033: CBO | Fox Business
13 Medicare hospital fund to run out of money in 2028: trustees (fiercehealthcare.com)
14 Here’s the inflation breakdown for December 2022 — in one chart (cnbc.com)
15 S&P 500 Returns since 1926 (officialdata.org)
16 $1 in 1926 → 2023 | Inflation Calculator (in2013dollars.com)
17 Here’s What Happens When You Invest in a ‘Down’ Year | Nasdaq
18 2022 was the worst-ever year for U.S. bonds. How to position for 2023 (cnbc.com)
19 U.S. hits debt ceiling as partisan standoff sparks economic worries | Reuters
20 Statista Get the Facts on Home Equity and Seniors (ncoa.org)
21 U.S. Average Cash, Savings, and Home Equity Balances | NewRetirement
22 Senior Home Equity Exceeds Record $11.81 Trillion (prnewswire.com)
23 Unlocking housing wealth for older Americans: Strategies to improve reverse mortgages (brookings.edu)
24 SDG&E Bills to Rise Sharply in January After U.S. Natural Gas Prices Double – Times of San Diego
