Will Reverse Mortgages Rescue the Baby Boomers?

Introduction

Many of today’s workers are at risk of having insufficient resources in retirement. The reason for this gloomy picture is a rapidly changing retirement landscape defined by a rising Social Security retirement age, a sharp decline in traditional pensions coupled with modest 401(k) balances, low saving rates, and longer lifespans. However, one potential bright spot is housing equity, which has grown rapidly in recent years and is the largest non-pension asset for most households. The home value for the typical household approaching retirement was $200,000 in 2004 — up from $139,000 in 2001. This brief examines the extent to which homeowners can count on housing wealth to support their consumption in retirement. The first section introduces reverse mortgages as an option for accessing housing wealth in retirement. The second section describes trends in the reverse mortgage market. The third section explains what factors determine how much a homeowner can borrow through a reverse mortgage. The fourth section highlights the impact of changes in interest rates on reverse mortgages. Given the sensitivity to interest rates, households planning for retirement should be careful not to overestimate the potential of home equity…