Wednesday, October 7, 2009

Housing and retirement

The Society of Actuaries' Committee on Post Retirement Needs and Risks has just issued a new monograph containing papers that provide varied perspectives on housing and retirement issues of concern to financial professionals, policymakers, and homeowners, among others. An overview provided by Anna Rappaport and Steve Siegel highlights key takeaways under various topics: wealth, spending, options and types of housing, fraud and improper loans, housing related to the financial crisis, and use of equity and products.

Here's a sampling of takeaways:

  • Housing assets are an extremely important component of total wealth in both the United States and Canada, particularly for middle income households. Home equity is greater than the invested financial assets of many older adults and it has been often converted to cash and used to finance other spending, sometimes leading to financially detrimental results and longer term problems.
  • Housing is a major part of spending and the largest item of spending for most retirees. Traditional ideas about what is affordable have been displaced in recent years by a “spend more and borrow more” philosophy.
  • Many of today’s retirees get by on a combination of a paid for house, social security and some emergency funds.
  • Housing values do not always increase and in fact, can decline a great deal. Housing bubbles and over inflated prices are not new, and a review of financial history would have warned that upward housing prices are not guaranteed.
  • Reverse mortgages may offer significant income potential to some households, but at relatively high cost and risk. They may help older households remain in their homes, but they limit future housing choices.
The studies included in the monograph demonstrate that housing issues must be considered alongside other critical issues including longevity risk, potential changes in health, and inflation. Combining these and other factors, accompanied by the decrease in housing wealth, dramatically increases the instability of financial security in retirement. This situation poses significant challenges to financial professionals engaged in retirement planning.

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