Mortgage Professor: Retirement plans must work for the less affluent

Retirement plans for less affluent seniors should be a greater focus to fix the impending retirement crisis, especially considering that most less affluent seniors have the vast majority of their wealth tied up in their homes. This is according to Jack Guttentag, aka the “Mortgage Professor,” in his latest piece published at Forbes.

“The median net worth of retirees aged 65-74 was only $266,000 in 2019, of which $240,000 was in their homes,” Guttentag writes. “All indications are that in the last few years, the problem has gotten worse. Bottom line, at least half of all retirees today live in fear of having to live on meager social security benefits.”

The best path forward would be for institutional barriers surrounding the conversion of housing wealth into cash to be removed for less affluent retirees, Guttentag says.

“The core need is for retirement plans that work for the less affluent,” he writes. “Well-heeled retirees have access to an industry of advisors offering financial asset management services, but that industry does not meet the needs of the larger group of retirees whose wealth is largely in their homes.”

The two major programs that exist and which could accomplish these goals without expanding the federal deficit are annuities which can provide cash payments for life, as well as a program like the Federal Housing Administration (FHA)’s Home Equity Conversion Mortgage (HECM) which are offered by private lenders. Guttentag also describes other products including equity sharing agreements.

“The problem is that these programs are delivered by specialized providers: financial asset managers manage assets, insurance companies offer annuities, reverse mortgage lenders offer reverse mortgages, and home equity purchase firms purchase home equity,” he says. “None of them guide the retiree on how the different components can fit together into a coherent retirement plan. The result is that enormous synergies are unrealized.”

In pursuit of realizing such synergies, Guttentag advocates for technology to generate an optimum retirement plan that takes such products into account, a more efficient delivery structure with a dedicated plan coordinator, and more competitive pricing in the annuity and HECM markets.

“Implementation barriers are formidable but surmountable,” he says. “HECM reverse mortgage lenders are deterred by fear of violating HUD rules that are antithetical to annuities. Annuity providers won’t write annuities that have been financed with reverse mortgages. Federal Government assistance programs measure economic need by income rather than by net worth, which is the appropriate measure of economic need of retirees. Many financial advisory firms denigrate annuities which reduce the financial assets of clients on which their fees are based.”

Read the column at Forbes.

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