In one significant way, retirement is materially different than it used to be: far more retirees are still trying to pay off their houses.
Thirty years ago, just one of every four homeowners in their late 60s to late 70s still had a mortgage – today, nearly half do. Once people hit 80, mortgages used to be extremely rare – only 3 percent had them. Today, it’s one in four, Harvard’s Joint Center for Housing Studies recently reported.
Retiree’s financial condition depends on much more than how much they spend on housing – in particular the size of their retirement savings accounts and Social Security checks. But rent or a mortgage payment is typically the largest item in the monthly budget. Being free of both can be a significant boost to one’s standard of living in retirement.
Jennifer Molinsky, a senior research associate at Harvard’s housing center, described several developments over the past three decades that may explain the dramatic increase in the share of retirees with mortgages.
First, she said, Americans today “seem to have less aversion to debt” than the generation that grew up after the Great Depression and was instilled with frugality. Although consumer debt levels always ebb and flow with the economy’s cycles, total debt as a percentage of disposable income is significantly higher today than it was in the 1990s. The 1986 tax reform act also made mortgages a more attractive form of debt to hold. The reform eliminated the income tax deductions for interest on credit cards and other types of consumer debt, with one exception: mortgage interest.
Having a mortgage isn’t necessarily a bad thing. Mortgage rates have fallen dramatically in recent decades. Many retirees who are still making monthly mortgage payments were able to reduce the payments by refinancing old, partially paid off mortgages into new 30-year loans with lower interest rates.
But another factor that may have pushed up the share of retirees with mortgages has been the long-term run-up in house prices, relative to earnings, which makes it increasingly difficult to pay off a house before retiring. In the late 1980s and early 1990s, house prices were about three times the typical household’s earnings, according to the housing center. Today, prices are more than four times earnings. …Learn More
The baby boom generation is continuing to work its way up the age ladder. The number of Americans over 80 will more than double to nearly 18 million over the next two decades.
And that’s partly because baby boomers are healthier and are living longer – they are also enjoying more of their retirement years free of disability than previous generations. But unfortunately, boomers can’t avoid the inevitability of their growing vulnerabilities and the impact this will have on their day-to-day lives. A new report by Harvard’s Joint Center for Housing Studies makes some sobering predictions about the issues the oldest retirees can expect to face in the future, from widening income inequality to more people living alone and in isolation.
The findings, taken together, point to a range of potential trouble spots revolving around housing our aging population.
As people get old, their spouses die, their bank accounts dwindle, and their rents keep rising. For these and other reasons, housing creates more of a cost burden at 80 than at 65. The Harvard housing center defines someone as cost-burdened if they spend more than 30 percent of their income on housing. Today, nearly 60 percent of households over 80 fit this definition, and their absolute numbers will increase as more baby boomers reach that age. One place the financial strain shows up is food budgets: retirees who spend disproportionate amounts on housing spend half as much on food as people whose housing costs are under control. …
The first and arguably most important decision a new graduate will make is how much to pay for rent.
If it’s too high, the rent – on top of those annoying student loans – will push out other priorities necessary to prevent financial trouble down the road.
Rick Epple, a certified financial planner in Minnesota’s Twin Cities area, counsels his daughter’s friends and clients’ children entering the labor force to keep their rent at around 20 percent of their income.
“Nobody ever talks about what they should spend,” he said. He worries about young adults who pay a third of their income – the standard recommendation – for an apartment. If the rent blows a hole in the budget, paying student loans every month and on time becomes a much bigger challenge.
A paycheck, Epple said, “just goes quick.”
A manageable rental payment also leaves room to prepare for the inevitable unexpected expense – and, yes, retirement. …Learn More
Retirement, as portrayed in TV commercials, is the time to indulge a passion, whether tennis, enjoying more time with a spouse, frequent socializing, or civic engagement.
Boston University sociologist Deborah Carr isn’t buying this idealized picture of aging.
“This gilded existence is not within the grasp of all older adults,” she argues in “Golden Years? Social Inequality in Later Life.” “For those on the lower rungs of the ladder,” she writes, retirement is “marked by daily struggle, physical health challenges and economic scarcity.”
Her book, which mines multidisciplinary research on aging, reaches the distressing conclusion that economic inequality not only exists but that it becomes more pronounced as people age and become vulnerable. And this problem will grow and affect more people as the population gets older.
Poverty has actually declined among retirees since the 1960s. But by every measure – health, money, social and family relationships, mental well-being – seniors who have a lower socioeconomic status are at a big disadvantage. They have more financial problems, which creates stress, and they are more isolated and die younger.
Throughout the book, Carr documents the myriad ways the disparities, which begin at birth, reinforce each other as people grow up and grow old.
“Advantage begets further advantage, and disadvantage begets further disadvantage,” Carr concludes. For the less fortunate, “old age can be the worst of times,” she said. …Learn More
If the difference in men and women’s pay is a gap, then the wealth difference can only be described as a chasm.
Women earn 80 cents for each dollar a man earns. But a woman has 32 cents of net worth to a man’s dollar.
One byproduct of the #MeToo movement is the fresh light it has put on the age-old women’s issues of unequal professional status and pay. But Elena Chavez Quezada, senior director of the San Francisco Foundation, explains in this video that wealth – home equity and financial assets minus debts – provides a more accurate picture of financial stability over the long-term.
A 2018 report found that net worth for older women, adjusted for inflation, has actually declined over the past two decades.
“If we are going to build women’s economic security, we have to talk about income and wealth inequality,” said Quezada, whose foundation promotes economic security for women and minorities.
Of course, wealth can’t be separated from pay. Women are able to save less, because they earn less and are more likely to have part-time jobs. A smaller share of them have a retirement plan at work than men, and the typical female worker saves 6 percent of her pay, compared with 10 percent for men, according to the Transamerica Center for Retirement Studies.
Although single women have slightly higher rates of homeownership than single men, if a woman can’t afford as large a down payment as a man, she starts out with less home equity.
Older women of color saw the largest decline in their net worth, according to the 2018 report, which was conducted by the University of Pennsylvania’s School of Social Work and the non-profit Asset Funders Network. …Learn More
One thing really stood out in a recent study: the deterioration in Hispanics’ retirement prospects since the 2008-2009 recession.
Workers’ success at saving for retirement is becoming increasingly important to their financial security in old age. This puts Hispanic households at a clear disadvantage: they earn half as much as white households, which makes it that much more challenging to build retirement wealth by buying a house or saving more in their 401(k)s – two-thirds of Hispanic workers don’t even participate in an employer 401(k).
White Americans aren’t exactly in great shape either. Today, 48 percent of them are at risk of experiencing a drop in their standard of living after they retire – this is 6 percentage points higher than before the recession, according to a new study by the Center for Retirement Research. Black Americans are worse off than whites, though their situation hasn’t changed much over the past decade.
But 61 percent of Hispanic workers are at risk – a 10-point jump since the recession – the study found. A big reason is that Hispanic homeowners were hit especially hard by plunging house prices during the mortgage crisis in states like Florida, Nevada, Arizona, and California, where they are heavily concentrated. Their home equity values dropped 41 percent, a result of buying “houses in the wrong place at the wrong time,” the researchers said.
The loss of home equity has a big impact on retirees by reducing the amount they can extract from their properties by purchasing less expensive housing or taking out a reverse mortgage. (The researchers assume that when workers retire, they will use reverse mortgages.) …Learn More
Retirees’ primary sources of income are the usual suspects: Social Security and employer retirement plans. They rarely use a third option: the equity locked up in their homes.
The Urban Institute recently quantified how much this untapped equity could be worth to seniors in the United States and 10 European countries if it were converted to income – and the amounts are significant.
The typical retired U.S. household has the potential to increase its retirement income by 35 percent, researchers Stipica Mudrazija and Barbara Butrica estimate. In Europe, using home equity would add anywhere from 19 percent in Sweden to 100 percent in Spain. …Learn More