Americans who are 62 or older had an estimated $3.6 trillion in total equity locked up in their homes in the first quarter of 2014, according to the National Reverse Mortgage Lenders Association. A new primer suggests they should start thinking seriously about using it to generate some extra retirement income.
The primer, published by the Center for Retirement Research at Boston College, which sponsors this blog, discusses two ways retirees can use home equity to generate income: by downsizing into a less expensive house or condominium or by taking out a reverse mortgage.
Click here to read the booklet online and learn how these strategies work and how much money each can provide. Their pros and cons are detailed in the graphic below, excerpted from the booklet:
Policymakers often worry that increasing government pension benefits won’t necessarily help retirees, if the reforms cause workers to change their behavior in ways that counteract them. For example, some workers might save less if they know pension benefits are rising, offsetting the income boost they’ll get from a larger pension.
However, researchers examining Canada’s pension reform over five decades confirm that they have materially improved the financial well-being of retirees there.
To reach this conclusion, Kevin Milligan of the Vancouver School of Economics and David Wise of Harvard University tracked the financial status of older Canadians from 1960 through 2010. They analyzed some 100,000 families between 55 and 80 years old using Canada’s Survey of Consumer Finances, the Survey of Labor and Income Dynamics, and the Family Expenditure Survey.
They conducted simulations to estimate what benefits would have been if no policy changes had been made since the 1960s. This simulation showed that the poverty rate, based on the incomes of Canadians from ages 70 through 79, would have been 34 percent. But today, in the aftermath of reforms, only 4 percent of older Canadian families are poor. [The researchers did a second simulation based on an alternative poverty measure: how much older Canadians spend on shelter, food, clothing and other goods. This also showed a decline in the poverty rate, albeit smaller.] …Learn More
A new study estimating that just 12 percent of low-income older Americans save in a 401(k) or similar employer retirement plan also suggests that many more would save – if only they could.
The researchers – April Yanyuan Wu, Matt Rutledge, and Jacob Penglase of the Center for Retirement Research – focused on individuals between ages 50 and 58 with household incomes below three times the poverty line. That was less than $36,357 in 2010 for a one-person household, for example, and less than $46,800 for two people. The period studied spans 1992 through 2010.
Retirement saving primarily takes place in workplace plans. But to participate in a plan, workers must clear four hurdles. First, they need a job. Next, their employer must offer a retirement savings plan. If there is a plan, they must be eligible to participate. And if eligible, they must sign up and contribute.
A failure to sign up can’t be blamed for the dismal savings rate of this low-income group. Instead, the problem is that many never get the chance. …Learn More
Less than $11,300 – that’s how little savings one-quarter of all Medicare beneficiaries have in their 401(k)s, IRAs, and other financial accounts.
This grim statistic comes out of a report by the Kaiser Family Foundation, a health care and policy non-profit. Kaiser’s goal was to gauge whether older Americans will be able to absorb rising Medicare premiums, co-pays, deductibles and related costs.
“Most people on Medicare are of modest means with relatively low incomes, low savings and low home equity,” concluded Gretchen Jacobson, the foundation’s associate director of the Medicare policy program and lead author of the report.
When retirees’ incomes can’t cover their out-of-pocket costs, they need money in the bank to pay for care. But half of all Medicare beneficiaries have annual incomes below $23,500 and have less than $61,400 in the bank – less than the cost of a year in a nursing home – Kaiser said.
The foundation’s report also projects beneficiary incomes and wealth over the next two decades, as baby boomers age: much of the growth in incomes and wealth will be skewed toward individuals in the higher income and wealth brackets.
This report should “raise questions about the extent to which the next generation of Medicare beneficiaries will be able to bear a larger share of costs,” Kaiser said.Learn More
About 15 percent of Americans age 65 and over are poor, according to the federal government’s alternative definition of poverty, known as the Supplemental Poverty Measure, a yardstick that takes into account seniors’ out-of-pocket medical expenses, as well as income and tax effects not included in the standard measure of poverty.
A compelling new video profiles poor older Americans who live in Baltimore, rural West Virginia, and Los Angeles. In the video, produced by the Kaiser Family Foundation, a non-profit research and policy organization focused on health care, the seniors identify rising rents and medical expenses as major explanations of financial hardship, which can mean lacking enough money for food.
Squared Away also has interviewed seniors living in a Boston housing complex for low-income seniors. To hear their stories, click here. Learn More
The IRS effectively gives money away to low-income Americans who save for retirement.
Workers meeting the agency’s income requirements can receive a Saver’s Tax Credit equal to as much as half of their total deposits into a 401(k) or IRA. The lower one’s income, the bigger the credit.
The program, which was made permanent in 2006, gives a nice boost to the nation’s lowest-paid workers, who are also most vulnerable in retirement. And not taking advantage of the credit, said Jim Blankenship, a financial planner in New Berlin, Illinois, “is a lot like giving up an employer match for a 401(k).”
Low-income workers do just that, a previous study found: 40 percent decline to participate when their employer offers a 401(k). But the Savers Tax Credit may provide another avenue to this under-covered population.
The annual income requirements for the credits, shown in the following table, apply to calendar year 2013 tax filings due April 15. …
*Note: Credits are equal to 10 percent, 20 percent, or 50 percent of total contribution.
There’s a growing awareness of the chasm between average working Americans and those at the top of the earnings scale.
What isn’t widely recognized is that this broad economic trend is spilling over into retirement incomes, which depend on how much people earn and save while they’re still working.
“The increasing wage inequality we see during the working years plays out over the life course and will result in more unequal incomes at older ages,” said Richard Johnson, an economist with the Urban Institute in Washington.
Johnson recently compared the incomes of today’s retirees with his income projections for the youngest members of Generation X who will enter retirement in about 30 years. He found that the imbalance between those at the top and bottom is expected to be wider for Gen-X.
In his study, retiree income includes Social Security benefits, pensions from traditional defined benefit plans, and employment earnings. Johnson also assumes that people spend down their 401(k)s, but he does not include equity in one’s home, which retirees can also convert to income. …Learn More