By Daniel Hunt, Lisa Shalett, Zi Ye, and Stephanie Wang on March 31, 2020
The answer to the question, “How prepared are you for retirement,” depends a lot on whether you look holistically at the balance sheet, including home equity, or just at the portfolio and income sources like Social Security. When home equity is ignored, that can cause households to make suboptimal decisions, such as forgoing longplanned spending it could afford or taking more investment risk than it’s comfortable with. When a questionable decision like that encounters the kind of market downturn we are currently experiencing, it can do serious damage to household ﬁnances and well-being.
Wanting to learn more about consumer spending in retirement? This article discusses the following topics:
Empirical research on retiree
spending has noted a “retirement consumption puzzle,” where retiree
expenditures tend to decrease both upon and during retirement. This
decrease in spending is inconsistent with general economic theories on
consumption, which suggest individuals seek to maintain constant
consumption over their lifetimes.
Government data on consumption was analyzed in this study to understand how retiree consumption actually changes over time.
results of the analysis suggest that although the retiree consumption
basket is likely to increase at a rate that is faster than general
inflation, actual retiree spending tends to decline in retirement in
real terms. This decrease in real consumption averages approximately 1
percent per year during retirement.
A “retirement spending
smile” effect is noted. This finding has important implications when
estimating retirement withdrawal rates and determining optimal spending
Authors: Dr. Wade Pfau; Joe Tomlinson, FSA, CFP®; Steve Vernon, FSA
This project explores various design and implementation details for the Spend Safely in Retirement Strategy (SSiRS), a strategy identified by the authors’ 2017 research project titled Optimizing Retirement Income by Integrating Retirement Plans, IRAs, and Home Equity: A Framework for Evaluating Retirement Income Decisions.
The SSiRS is intended as a baseline retirement strategy, to be used by middle-income workers and retirees to generate retirement income from their IRAs or employer-sponsored defined contribution (DC) retirement plans, such as 401(k) plans. It uses investment options commonly found in IRA and DC administrative platforms, and does not require the ongoing assistance of a financial adviser.
The reverse mortgage market world heads in reverse away from the government created Home Equity Conversion Mortgage (HECM) and towards new propriety products. This is an encouraging sign because any healthy market needs competition, innovation, and variety. However, recently HECM program has been the driving force behind the reverse mortgage world, leaving many without an ideal solution to utilizing home equity as part of a sustainable retirement plan.
The Journal of Retirement Fall 2015, 3 (2) 61-79; DOI: https://doi.org/10.3905/jor.2015.3.2.061
There is little doubt that many older Americans are not well prepared financially. The reverse mortgage is a financial instrument that can brighten their financial prospects and reduce the chances of an old age in financial straits. This article explains how reverse mortgages work. Recent research shows that strategically combining reverse mortgages and investment portfolios can significantly boost sustainable retirement income. Moreover, in the last three years the regulatory framework has been revised to develop further the market for these instruments. Reverse mortgages are increasingly recognized as a valuable financial planning tool. They are now seen as well suited for retirees—not only underfunded homeowners who turn to a reverse mortgage as a last resort, but also those who enter retirement well-funded.
Research for this report was conducted by Amanda Lehning, PhD, Postdoctoral Fellow at the University of Michigan School of Social Work, and Annie Harmon, PhD Candidate, University of Michigan School of Public Health in collaboration with the Stanford Center on Longevity.
Aging in place is the ability to remain in one’s own home or community in spite of potential changes in health and functioning in later life. Aging in place has received an increasing amount of attention in recent years. This is due to a number of factors, including the aging of the population, a potential increase in chronic disease and disability in future cohorts of older adults, and an inadequate U.S. long-term care system. Furthermore, a survey by AARP in 20031 and another survey by the AdvantAge Initiative in 20042 demonstrated that an overwhelming majority of adults would like to remain in their own homes for as long as possible.
by Peter Neuwirth, FSA, FCA; Barry H. Sacks, J.D., Ph.D.; and Stephen R. Sacks, Ph.D.
This paper examines the effect of using reverse mortgage credit lines to supplement retirement income by two types of retirees that have not been addressed in the previous literature: (1) those whose retirement savings are significantly below those of the mass affluent; and (2) those who are “house rich/cash poor.”
Results of this analysis demonstrate an important contrast with the results of the earlier literature; specifically, the greater percentages of home value, when coordinated with the retirement savings portfolio, resulted in substantially greater percentages of the portfolio that can be drawn.
This paper suggests a new alternative to the 4 percent rule that can guide planners and retirees toward an optimal cash withdrawal strategy. This new rule takes into account the total of the retiree’s retirement savings plus his or her home value.
The quantitative analysis in this paper uses the same spreadsheet models and strategies first presented in the Journal by Sacks and Sacks (2012). This paper builds on that work by extending the analysis to a broader range of retirees.
by Shaun Pfeiffer, Ph.D.; John Salter, Ph.D., CFP®, AIFA®; and Harold Evensky, CFP®, AIF®
This study investigates maximum real sustainable withdrawal rates (SWRs) for retirement plans that incorporate the use of standby reverse mortgages (SRMs). The SWR is defined as the maximum real withdrawal rate with a minimum 90 percent plan survival rate for a 30-year retirement horizon.
The SRM evaluated in this study is a Home Equity Conversion Mortgage (HECM) reverse mortgage line of credit that is established at the beginning of retirement and is used for retirement income during bear markets. Outstanding loan balances are repaid from the Investment Portfolio (IP) in bull markets.
Monte Carlo simulations were used to estimate the success of the SRM strategy at various real withdrawal rates for a client who has a $500,000 investment nest egg and $250,000/$500,000 in home equity at the beginning of retirement. The $500,000 nest egg is split into a 60 percent stocks and 40 percent bonds IP and a six-month cash reserve.
Retirees who begin retirement in a low interest rate environment (2.3 percent yield on 10-year U.S. Treasury bond) with competitive lending terms and significant home equity relative to the IP stand to benefit the most from an SRM strategy. Interest rates and the size of the initial line of credit relative to the IP are the two factors that are shown to have a significant impact on the SWR for the SRM distribution strategy.