May 2021

Tapping Home Equity – Retirees’ Relief Valve

Woman getting a prescriptionOne telling indication that retirees are in serious financial straits is when they take less of their medications or don’t fill prescriptions.

Nearly one in four low-income retirees has difficulty paying for medications, despite passage of Medicare Part D in 2006, which reduced out-of-pocket drug costs. Between 2011 and 2015, the average Medicare beneficiary spent $620 to $700 a year on prescriptions, and people with diabetes, lung disease, and cardiovascular disease spent more than $1,000 a year.

One way retirees can address such hardships would be to tap some of the equity in their homes. Although a homeowner probably wouldn’t use this strategy just to cover drug copayments, new research finds that older Americans who tap equity significantly increase their adherence to their medications – and this finding has broader significance for improving their retirement security.

Most older homeowners are, on the one hand, reluctant to pull cash out of their homes – often their largest asset – through a home equity loan, mortgage refinancing, or reverse mortgage. Yet many of them don’t have enough income to live comfortably and could put this asset to good use to reduce their debt or pay medical bills if they become seriously ill.

To test how home equity might help retirees, the researchers used a series of surveys between 1998 and 2016 that have data on older people’s finances and ask whether, at any time in the past two years, they took “less medication than prescribed … because of the cost?” The analysis controlled for various influences on financial well-being, including education, marital status, and cognitive health, as well as financial resources.

Extracting home equity improved adherence to medications in the short term, particularly for homeowners over 65 who have little wealth outside of their homes. Separately, the researchers showed that retirees who tapped home equity were significantly more likely to take their medications at a critical time – after experiencing a serious illness.

“Housing wealth can play an important role in reducing economic insecurity,” concluded the study, which was funded by the U.S. Social Security Administration. …Learn More

Psychology Added to CFP Certification

Financial advisers have no shortage of clever strategies to dispense to their clients. The tricky part is getting the psychology right.

Human beings have all kinds of hang-ups about money. Presumably, someone who’s walked into a financial adviser’s office has broken through the first barrier to getting help: denial. But even then, blind spots and fears can get in the way of a client choosing or executing a financial plan, even if it’s clearly beneficial.

To that end, psychology is being added to the educational curriculum – along with the longstanding topics like risk management, tax planning, and investing – required for advisers to get certification as a Certified Financial Planner, or CFP. 

Money “is a very emotional topic,” said John M. Loper, a CFP and director of professional practice on the CFP Board. That, he said, is a compelling reason for addressing clients’ psychological issues head-on: “If you can’t connect with your client, it’s going to be difficult for them to take your advice.”

The idea came out of feedback the CFP received in a 2019 study, but COVID-19 pushed the issue to the forefront, he said. The psychology curriculum will include managing crises, such as pandemics and stock market drops, that have severe financial consequences.

Wells Fargo’s Michael Liersch, who has a PhD in behavioral finance, said that giving financial advice is challenging because some people are uncomfortable even starting a conversation about money. In families, it’s often a point of contention between husbands and wives or parents and children. Talking about money risks exposes big differences in how it should be used, and the conversations can turn negative.

“People think it’ll be disruptive, so they don’t bring it up,” said Liersch, head of financial advice and planning for Wells Fargo. …Learn More

employees working processing packages

Growing Job Demands Fall Harder on Some

As technology transforms the work world, jobs that were once routine might now require good interpersonal skills or the ability to quickly adjust to the situation at hand.

The people bearing the brunt of these challenges are the same people who were already at a disadvantage in the labor force: workers who never attended college.

New research on more than 700 occupations found that the types of jobs held by workers with only a high school education have become more difficult in recent years, which has sharply limited their job opportunities. The opposite is true for college graduates, whose jobs have gotten easier, opening up new opportunities for them.

“The changing nature of work over the past 15 years may have deepened inequality across educational groups,” according to the study funded by the U.S. Social Security Administration.

The data for this research came from an occupational database, as well as a one-time survey fielded by RAND in 2018 that asked workers to assess their current mix of natural abilities – as distinct from skills learned on the job – in four areas. The first area is cognitive abilities, which include communication and mathematical acuity. Physical abilities range from strength to flexibility. Sensory abilities include hearing and depth perception. Psychomotor refers to hand-eye coordination and fast reaction times.

The researchers first identified the abilities required to do more than 700 jobs held by the workers in the survey, as detailed in the federal government’s occupational database, and compared the current requirements with the 2003 requirements for each job.

The abilities required of workers with no more than a high school degree increased in all four categories. Construction workers are a good example. Their need for writing proficiency has increased dramatically. And today’s warehouse workers must move at breakneck speed to keep up with the sophisticated technology being used to fill orders for overnight delivery.

Contrast these workers to the college graduates, whose job requirements have lessened in three of the four categories. Only their need for sensory abilities, such as hearing and depth perception, has increased – and not by as much as the workers who didn’t go to college.

The researchers also found that the shifting job demands have very different implications for each group’s employment potential. …Learn More

A small house

Home Equity Rises. Reverse Mortgages Don’t

The housing market has shrugged off the pandemic, and home prices are rising sharply due to historically low interest rates. The market crash more than a decade ago is a distant memory.

Home Equity graphThe total value of the equity in older Americans’ homes has doubled since 2010, hitting $8.05 trillion at the end of last year. The irony is that federally insured reverse mortgages, which allow a long-time homeowner to cash in on tens of thousands of dollars of equity, aren’t very popular.

Last year, only 42,000 Home Equity Conversion Mortgages (HECMs) were sold – half as many as in 2010 – according to the U.S. Department of Housing and Urban Development (HUD).

One reason HECM reverse mortgages haven’t caught on, as the Consumer Financial Protection Bureau notes, is that they might not be suitable to homeowners who eventually sell their house. As the loans accrue interest, the “balance is likely to grow faster than their home values will appreciate,” the agency said.

But most retired homeowners never move, and HECMs are one option for people who are short on income. “We accept it as ‘normal’ to spend-down 401(k) funds, yet somehow home equity is sacrosanct,” said Dave Gardner, a former mortgage broker who sometimes handled reverse mortgages. Retirees, he said, should consider this question: “Could you achieve a better result and extend the lifespan of your nest egg with a reverse mortgage?”

To qualify for the loans, borrowers must be at least 62. They can take the reverse mortgage proceeds in the form of a lump sum, line of credit, or monthly payments – or some combination of these.

Curious homeowners can check out the federal government’s new pamphlet, which explains the basics of reverse mortgages. It’s aimed at people who already have the loans but is just as useful for people who are curious about using one themselves.

Before proceeding with any complex financial transaction, however, it’s critical to do due diligence. A reverse mortgage is no different. …Learn More