Two years ago, George and Mollie Weiner were scraping by on $1,800 a month in Social Security payments and just $100 in monthly payouts from their individual retirement accounts.
But last year, the couple, both 80, realized they could generate more income from their two-bedroom condo near Tampa, which had more than doubled in value since they bought it in 1997. They took out a “reverse mortgage,” a loan that does not require monthly repayments, giving them access to more than $100,000.
“We are very relaxed now because we have extra spending money,” George Weiner said. “And the house is taking care of it.”
An increasing number of retirees may be starting to follow the Weiners’ example. New data released by the Federal Reserve shows that for the elderly, like Americans in general, housing wealth has soared even as other forms of savings have declined.
The Fed’s latest survey of consumer finance showed that overall wealth increased very little for most American families from 2001 to 2004. For the typical American household, net worth–the sum of all assets less debts–barely increased, to $93,100 from $91,700. Their savings dropped by 23 percent while the value of their homes rose 22 percent.
For retirees, this shifting financial status is likely to force many of them into a decision no other generation has faced: to use their home as the centerpiece of their retirement plan.
Americans have not traditionally used their homes to finance retirement, choosing instead to pay down the mortgage and bequeath the house to their children. But the increasing wealth that has concentrated in homes during the boom of the last decade, compared with dwindling pension benefits and lackluster market returns, means that many retirees are finding that their largest source of additional income could come, in fact, from their homes.
“People are living longer and longer, so over time they’re going to be draining their retirement accounts,” said Gillette Edmunds, an investor and co-author, with Jim Keene, of “Retire on the House: Using Real Estate to Secure Your Retirement” (John Wiley & Sons: 2005).
“The only thing they are not draining yet is their houses,” Edmunds said, “and that’s what they’re going to have to turn to.”
The Fed’s 2004 survey, released last month, painted a precarious tableau of retirement planning.
Just under half of all families held retirement accounts in 2004, down from 52.2 percent in 2001, the date of the prior survey. And the typical account held merely $35,200, only two-thirds of the $52,200 held three years ago. (All figures are adjusted for inflation.) The stock market has rebounded from its low in 2002, but the Fed’s survey illustrates the lingering damage inflicted by the stock market collapse and the 2001 recession on Americans’ net worth. At the same time, it underscores how the surge in housing prices has propped up otherwise shaky balance sheets, even as housing prices in some markets appear to have peaked.
The typical family’s savings–either in retirement accounts or elsewhere–fell to $23,000, almost $7,000 less than three years earlier. Meanwhile, the median indebtedness of the three out of four families who had some form of debt rose by a third, to $55,300.
The erosion of savings affected the wealthy and the poor alike. The savings of people at the top 10 percent of the income scale declined by 6 percent, to $365,100, and their income, on average, fell by about the same proportion. (Meanwhile, the typical American’s income rose marginally.)
The financial picture is particularly unsettling for those households headed by a retired person. The typical savings of such a family fell to $26,500 in 2004 from $34,400 in 2001.
“Everybody is having a terrible time,” said Alicia Munnell, who heads the retirement research center at Boston College. “Nobody is enjoying much in terms of growth in net worth. No one has enough to support themselves in retirement for 20 years.”
According to calculations by Munnell, even the group aged 55 to 64–the only age category to increase savings in the last three years–has amassed only a fraction of what people need to maintain their lifestyle in retirement.
Home prices provided pretty much the only upbeat news. Just over 69 percent of Americans owned their own homes in 2004, according to the Fed data. The median wealth accumulated in homes jumped to $160,000 in 2004 from $131,000 three years before, a rise of 22 percent.
Among households headed by retirees, nearly 76 percent owned their homes in 2004. The median value of their homes also jumped 22 percent, to $130,000, compared with $106,500 in 2001. Few people expect to draw equity from their homes to finance their retirement. “They use it more like catastrophic insurance,” said Steven F. Venti, an economist at Dartmouth College. “It’s not a means to finance day-to-day consumption.”
But increasing numbers of retirees may find themselves forced to turn to their homes for further income.
“A lot of people went into retirement with pension funds and stock market investments that they thought would serve them toward the end,” said Bronwyn Belling, reverse mortgage specialist at the AARP Foundation in Washington. “They’ve been in for some pretty rude awakenings.”
Already, evidence is mounting that older people are tapping the equity in their homes more aggressively. In the late 1980s, the Federal Housing Authority began a pilot program of reverse mortgages–loans, made mostly to seniors against the value of their homes, that do not require monthly payments.
Elderly borrowers whose incomes will not qualify them for a more traditional home equity loan can still opt for a reverse mortgage. The loans are usually worth some fraction of a home’s value, and only need to be repaid, with interest, when the house is sold or the borrower dies.
The program drew little attention for more than a decade. But as home prices soared, it took off. Last year, more than 43,000 older homeowners took out reverse mortgages insured by the Federal Housing Authority, a sixfold jump since 2000.
“This is the fastest-growing mortgage segment by far,” said Jim Mahoney, chief executive of Financial Freedom, an arm of IndyMac Bank that specializes in reverse mortgages. “Clearly this is a product whose time is coming.”
The wealth that retirees have accumulated in their homes may not only be used to finance day-to-day expenses, but long-term care as well. Barbara R. Stucki, who manages a project about reverse mortgages at the National Council on Aging, told a congressional subcommittee last year that a broader use of these loans could save many seniors from dropping into the arms of Medicaid, saving the federal program $3.3 billion to $5 billion a year in 2010.
Some retirees are cashing out of their homes to support themselves. Don Took, who worked most of his career as a stage actor in Southern California, sold his condo in Santa Ana last year for $355,000, nearly four times what he paid for it in 1998.
Took, 66, has invested the proceeds from the sale and now rents an apartment for $750 a month in North Hollywood. The investment income supplements his Social Security and pensions he receives from Actors Equity and the theater where he worked for most of his career. “Now I have more money than I ever did while I was working,” he said.
For many retirees, though, selling a home to finance other expenses is unappealing. According to an AARP survey released earlier this month, 89 percent of those over 50 said they wanted to stay in their homes as long as possible. For those aged 65 to 74, the proportion was even higher.
For the moment, families headed by people aged 55 to 64 appear to be in somewhat better shape than other age groups. Like everyone else, the prices of their homes boomed but unlike other cohorts, their incomes rose and their savings increased, according to the Fed survey. Yet even this group does not have enough in financial assets to pay for a secure retirement. According to Munnell of Boston College, families should save at least five times their annual income to finance an adequate retirement.
According to the Fed’s survey, however, the 95 percent of Americans 55 to 64 who had any savings at all typically had amassed $78,000, which is only about 1.5 times their median annual earnings.
That suggests that more of them will need to tap into their home equity. “We’re looking at the Baby Boomers coming in shortly and a lot of them have been earn-and-spend type personalities,” said W.L. Pulsipher, president of American Reverse Mortgage in Ocala, Fla. “So chances are they are going to be more apt to need to use their home than the current people that are doing it.”
