House roof illustrations

Behavior

Boomers Repairing their Mortgage Finances

The housing market collapse more than a decade ago inflicted a lot of financial damage on baby boomers nearing retirement. But a new study finds that some have been trying to make up for lost time by rapidly reducing their mortgage debt.

Since the Great Recession, the boomers who were born in the 1950s – they are now in their 60s – have paid down more than 40 percent of their remaining mortgages and home equity loans, on average – a much faster pace than their parents did at that age.

Not all the damage from the Great Recession can be repaired, however, because many people lost their homes in the wave of foreclosures. For example, the homeownership rate for the boomers born in the early 1950s quickly dropped slightly more than 10 percentage points after the housing crisis, to 67 percent, where it remained until 2016, the last year of data in the study.

Since then, the U.S. homeownership rate has increased but is still below the pre-recession peak.

The impact of the housing crisis was far less dramatic for Americans born in the early 1930s. Their homeownership rate dipped 2 percentage points right after the crisis, to a relatively high 76 percent, according to Jason Fichtner of Johns Hopkins University.

The decline in boomers’ homeownership leaves fewer of them with housing wealth to fall back on when they retire.

They have also fallen behind in fully paying off their mortgages, which would eliminate their monthly payments and make the house a low-cost place to live. Just half of the boomers born in the early 1950s who held onto their homes during the Great Recession own them outright – two-thirds of the people born in the early 1930s had paid off their mortgages by that age. …Learn More

Mortgage Paid Off

Behavior

Readers See Pros, Cons to Paid-off Mortgage

Baby boomers love to discuss this age-old question: Should I pay off the mortgage before retiring?

Our blog readers fell into two camps in their comments on a recent article.

Some made an emotional argument – that a mortgage-free retirement makes them feel secure. The other camp argued that paying off the mortgage does not make financial sense.

The article, “Boomers Repairing their Mortgage Finances,” described research showing that boomers have sharply cut what they owe on their mortgages by paying extra in the years since the housing market bust. People naturally pay more of this debt as they age. But the boomers’ rapid payoffs partly explain why 40 percent to 50 percent of Americans in their 60s no longer have a mortgage, wiping out what is often a retiree’s largest single expense.

Despite the recent payoffs, boomers still trail their parents. Roughly 80 percent of the homeowners born in the 1930s had paid off their home loans by the same age, according to Jason Fichtner’s analysis for the Center for Financial Security at the University of Wisconsin.

As for whether to pay off the mortgage, many boomers don’t have that luxury. After the wave of foreclosures a decade ago, Fichtner found, the homeownership rate for 60-something boomers quickly slid more than 10 percentage points, to around 65 percent. The U.S. homeownership rate has increased in recent years but is still below the pre-recession peak.

The financial argument against paying off the mortgage was made in a blog comment by Tony Webb, a research economist at The New School. “At current interest rates and anticipated inflation rates, mortgage borrowing is almost free,” he wrote.

“All but the most risk-averse should load up on money while it’s on sale,” he said. [Full disclosure: Webb used to work at the Center for Retirement Research, which sponsors this blog.]

Another reader, Beth, said paying off the mortgage “is one cornerstone of a worry-free retirement.” However, she knows “several financially savvy people who for various valid reasons have not paid off their homes.” …Learn More

Behavior

Readers’ Favorite Retirement Blogs in 2021

For the baby boomers who are looking down the road to retirement, generalities will no longer suffice. They are diving into the nitty gritty.

Their keen interest in retirement issues, based on reader traffic last year, range from why the adjustments to Social Security’s monthly benefits are outdated to how it’s still possible for boomers, even at this late hour, to rescue their retirement.

First, and most important, there is hope for the unprepared. In “No-benefit Jobs Better than Retiring Early,” readers who want to retire but can’t afford it learned that they can dramatically improve their finances by finding a new job – ideally a less stressful or physically demanding one. Even if the job doesn’t have employee benefits, working longer will increase their Social Security benefits and allow them to save a little more.

The most popular article tackled a complex issue: “Social Security: Time for an Update?” The article explained the program’s actuarial adjustments, which are based on the age someone signs up for their benefits and factors into how much they’ll get. The adjustments, set decades ago, are no longer accurate, due to both increasing life spans that affect how much retirees receive from the program over their lifetimes and persistently low interest rates.

If these factors were taken into account, the researchers estimate that the average person who starts Social Security at age 62 would get more in their monthly checks, and the average person who holds out until 70 would get less.

However, not everyone is average. High-income workers tend to live longer and retire – and claim Social Security – later, while low-income workers have shorter lifespans and disproportionately start Social Security at 62.  The researchers conclude that the inequities “are not a problem that can be solved by tinkering with the actuarial adjustment.” A true fix would “would require a reassessment of the benefit structure.”

A major issue facing boomers in their late 50s and early 60s is that households with 401(k)s typically have saved only about $144,000 for retirement in their 401(k)s and IRAs. The reasons for insufficient savings – explained in “Here’s Why People Don’t Save Enough” – boil down to things that are largely beyond their control, including disruptions in their employment, a lack of access to employer retirement plans, lower earnings than they’d hoped for, bad investments, unanticipated premature retirements, and health problems.

However, workers can do something to gauge how they’re doing: make sure they know how much they’ll get from Social Security. …Learn More

colorful arrows

On the Web

What the Research Can Tell us about Retiring

It’s difficult to envision what life will look like on the other side of the consequential decision to retire.

But research can help demystify what lies ahead – about the decision itself, the financial challenges, and even the taxes. Readers understand this, as evidenced by the most popular blog posts in the first three months of the year.

Here are the highlights:

The retirement decision. The article, “Retirement Ages Geared to Life Expectancy,” attracted the most reader traffic. Myriad considerations go into a decision to retire. But a sense of whether one might live a long time – because of good health or simply seeing that parents or neighbors are living unusually long – is a compelling reason to postpone retirement either to remain active or to build up one’s finances to fund a longer retirement.

A recent study found that as men’s life spans have increased, they have responded by remaining in the labor force longer, especially in areas of the country with strong job markets and more opportunity. This is also true, though to a lesser extent, for working women.

The planning. The second most popular blog was, “Big Picture Helps with Retirement Finances.” It described the success researchers have had with an online tool they designed, which shows older workers the impact on their retirement income of various decisions. When participants in the experiment selected when to start Social Security or how to withdraw 401(k) funds, the tool estimated their total retirement income. If they changed their minds, the income estimate would change.

The tool isn’t sold commercially. But it’s encouraging that researchers are looking for real-world solutions to the financial planning problem, since the insights from experiments like these often make their way into the online tools that are available to everyone.

The taxes. It’s common for a worker’s income to drop after retiring. So the good news shouldn’t be surprising in a study highlighted in a recent blog, “How Much Will Your Retirement Taxes Be?” Four out of five retired households pay little or no federal and state income taxes, the researchers found. But taxes are an important consideration for retirees who have saved substantial sums. …Learn More