Only one in six retirees (16 percent) and one in five pre-retirees (20 percent) have already used or plan to use equity in their home to help finance their retirement, according to a new report from the Society of Actuaries (SOA).
Neither pre-retirees nor retirees view using home equity to finance retirement as an attractive option, except for the sale of their homes and/or potential downsizing. However, for many Americans, investment in their homes is their largest single asset and can present a myriad of risks and also benefits when planning for retirement.
The report, Process of Planning and Personal Risk Management, identifies key findings from a survey of retirees and pre-retirees as it relates to retirement risk management strategies. The report highlights a number of risk management issues for retirement, including how housing is used to fund retirement.
The report found that individuals who generally tap into their home equity by selling their home (45 percent of retirees, 56 percent of pre-retirees) are much less likely to access this equity through:
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 or plan to completely pay off their mortgage to help with financial protection. Actuaries note that paying off a mortgage can be an important part of reducing expenses and income needs during retirement. While use of home equity through loans or reverse mortgages was not popular among survey participants, it is conceivable that the role of housing as a retirement asset will become more critical in the future.
"The subprime mortgage crisis and the Great Recession have created more long-term challenges for individuals to plan for and help fund their retirement, especially with how home equity is used," said actuary Tom Herzog, PhD, ASA, MAAA. "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. Individuals should consider using home equity as one of several tools in reaching a lifetime income to fund a rewarding and enjoyable retirement."
This SOA report highlights findings from the 2009 Risks and Process of Retirement Survey Report, and focuses on the issues in the survey specifically as they relate to the process of planning and personal risk management for retirement. The survey was conducted through telephone interviews of 804 adults age 45 to 80 in July 2009 and asked respondents about a number of risks relating to retirement. For the full report "Process of Planning and Personal Risk Management," please visit www.soa.org/files/pdf/research-key-finding-process-planning.pdf.
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