Can a Reverse Mortgage Secure Your Retirement?

Warm sun on your face and cool sand between your toes... This is not how your retirement plans are shaping up?

According to a recent study of working-age households, 45% of Americans are going to fall short of retirement hopes. The Center for Retirement Research at Boston College cites "...the demise of traditional pensions, rising longevity, soaring health care costs, and falling returns" as reasons that current workers must strive to save more.

National Retirement Risk Index (NRRI)

The Boston College research center uses their National Retirement Risk Index (NRRI) as the benchmark for evaluating the percentage of working-age households "at risk." The assessment of "at risk" is broadly defined as households not able to maintain their standard of living through retirement.

The impact of being "at risk" varies depending on the household's current standard of living. Some will simply need to cut back on a few extras while others will fall short of fundamental necessities. Both scenarios leave a large percentage of households destine to fall short of retirement expectations--both young and old.

Young and Old are "At Risk"

Surprisingly, this is not a quandary reserved only for our aging Baby Boomers. In fact, the "at risk" category is nearing 50% for younger households born between 1965-1972--almost 15% higher than early Boomers.

The factors that are rapidly shrinking retirement savings are hitting the younger population even harder. This demographic is almost completely without pensions, often save less, are absorbing the increase in health care, and may experience decling home values.

Reverse Mortgages and Home Equity

Another interesting trend revealed by the study is that 24% of survey respondents categorized themselves "at risk," while the Center's NRRI categorizes them not "at risk." This is a significant variance between the NRRI evaluation and households' own self-assessment of retirement preparedness.

Digging deeper reveals the probable source of the disconnect--home equity. The NRRI makes a fundamental assumption that retirees will leverage, or annuitize, all their financial assets. In simple terms--get a reverse mortgage.

This disconnect may highlight bigger challenges. Surveys of these same households show that most have no intention of tapping their home equity to supplement their retirement.

Getting a Reverse Mortgage for Retirement

The good news is that home values have significantly appreciated over the last several years. This appreciation often makes the home the largest non-pension asset for most--making it crucial to the "at risk" assessment.

It appears that a reverse mortgage would be a significant opportunity to secure many household's retirements. But, if retirees don't intend to tap this home equity is it a fair assumption to retirement preparedness?

Mauricio Soto, Senior Research Associate at Boston College's Center for Retirement Research, explained that although not perfect the reverse mortgage is a reasonable proxy to the portion of a household's home equity that can be used by retirees. Soto also pointed out the likelihood that as retirement assets deplete seniors will turn toward reverse mortgages.

Saving More and Working Longer

The problem of preparing for retirement is certainly not getting easier. The available solutions are not fun, but seem obvious--save more and work longer.

Fortunately, there may a little more in your retirement nest egg than you think by considering the equity in your home.

Retirement income assisted by a reverse mortgage my be the key to maintaining your standard of living or at least a safety net. Run your retirement numbers with a reverse mortgage and you might find yourself closer to retirement than you think.