|
Institute Analyzes Changing Role of Home Equity in America,
Details Strategies For Drawing Down on Homes' Value
BOSTON, February 14, 2007 -- New research and analysis in a special report issued today by the Fidelity Research InstituteSM cautioned American savers on relying too heavily on home equity as a significant retirement funding source.
The report, "The Equity You Live In: The Home as a Retirement Savings and Income Option" analyzes how cyclical downturns in residential real estate, low historical investment returns relative to other assets, and over-investment in a home can together create a risky scenario for investors hoping to rely on their home equity as a primary income source in retirement.
"While home equity presents some options for America's retirees, this report -- which counters some popular opinions -- clearly shows that many investors shouldn't count home equity as a significant retirement funding source," said Guy L. Patton, executive director, Fidelity Research Institute. "Of course, home equity can present an incremental income source for millions in retirement today and we have analyzed several strategies to access it if retirees can overcome various emotional hurdles associated with tapping home equity."
For example, the Institute's report discusses a 62-year-old couple, on the cusp of retirement, who could sell their $400,000 home and buy a new one for $300,000. When the proceeds from the sale are invested in an annuity and savings are realized from lower taxes and expenses on a less expensive home, the couple could add $4,830 in incremental income annually to help cover their retirement needs.
If moving out of a home is too much of an emotional issue for retirees, the Institute's report offers two strategies for accessing home equity via credit lines and reverse mortgages. In another example, a 75-year-old retired couple could use a reverse mortgage on their $400,000 home and add more than $13,000 a year to their income over 19 years to their planning horizon of age 94. The report also details various "pros" and "cons" associated with each strategy.
"While some experts have dubbed home equity a new leg on the retirement stool, next to Social Security, pensions and personal savings," said Patton, "our research shows it's not likely to be the silver bullet for filling large funding gaps."
Included in the report is attitudinal research conducted among retirees and pre-retirees, ages 55-75, to better understand their current use and future intent to leverage their home equity during retirement. It found that pre-retirees are much more open -- when compared to today's retirees -- to the idea of tapping home equity with about 40 percent saying they are planning to use home equity or are undecided. Among retirees, only 20 percent currently are using or plan to use home equity to help fund their retirements.
Previous generations of Americans often treated home equity as an illiquid asset being built up almost invisibly as mortgages were paid down," said Patton. "In the future, many Americans likely will enter retirement with home equity being the largest asset they have and they increasingly will view this asset as something that can be drawn against to help finance their retirement lifestyles."
Emotional Barriers to Using Home Equity
For those looking to tap home equity, there are significant emotional considerations that need to be weighed along with the financial ones. In fact, nearly half (43%) of retirees who have decided not to use their home equity, cite as a deterrent, the desire to remain living where they are comfortable as they grow old, and one-third (36%) cite not wanting to sell because they want to safeguard the home as a legacy for their children.
"Our research revealed a concerning trend, where the ideal candidates for leveraging home equity -- older retirees, women and ones who most needed additional financial resources -- are more hesitant to do so for emotional reasons," said Patton. "Yet many of these people likely have significant home equity that could supplement their retirement income if the right draw down strategy was employed."
Reverse Mortgage Market Still Maturing
Despite its potentially promising future, the Institute found that reverse mortgages have low adoption rates, suffer from misconceptions, and can be costly. Fewer than one-in-ten retirees (8 percent), who reported having leveraged their home equity, used a reverse mortgage to do so. Among pre-retirees, more than one-in-five who plan to leverage their home equity in retirement stated they do not "trust" reverse mortgages today.
The Institute's quantitative research was implemented via telephone and online interviews from October to November, 2006 with over 1,400 pre-retirees and retirees aged 55 to 75 years old by Richard Day Research of Evanston, Ill.
About the Fidelity Research Institute
The Fidelity Research Institute is designed to advance knowledge of how proven investment theory and public policy can be put into practice to help Americans invest wisely to meet their financial needs. The Institute works with resources across Fidelity Investments as well as within the financial services industry and academia to accomplish its mission. Its reports are available at www.fidelityresearchinstitute.com.
# # # |
