Security Benefit

There is a case to be made for home equity as the most important source of retirement funding in the United States, and this would seem to make the reverse mortgage a critically important consumer financial product since the reverse mortgage allows an individual to convert home equity into cash.

The reason is that home equity represents a significant portion of the net worth of most retirement age households in the United States.  Consider, for example, some of the following statistics:

• The median home equity percentage of net worth in a 2004 Survey of Consumer Finances is as follows for select retirement age groups:

1. 31.9 percent for ages 55-64 (these households do have some form of individual retirement account balance).
2. 34.7 percent for ages 65-74 (these households do have some form of individual retirement account balance).
3. 47.4 percent for ages 75+ (these households do have some form of individual retirement account balance).
4. 30.2 percent for ages 55-64 (these households do not have any form of individual retirement account balance).
5. 51.7 percent for ages 65-74 (these households do not have any form of individual retirement account balance).
6. 59.8 percent for ages 75+ (these households do not have any form of individual retirement account balance).

Further, consider the following:

• Many households in the United States have little or no retirement savings.  A recent EBRI survey indicates that 56 percent of households report less than $25,000 in retirement savings.
• Median household income in the United States in 2009 (all age groups) was $49,777.
• Using an 85 percent replacement ratio and the all-age-group median household income figure above, a very rough estimate of median household retirement income needs is $42,310 per year.
• The average Social Security benefit for a retired couple in the United States (2011 data) is $22,884.
• Using the highest end of the retirement savings range ($25,000) for the 56 percent of U.S. households referenced above, it can be assumed that private retirement savings can generate an additional $1,430 per year in income (through a $25,000 purchase of a single premium immediate annuity).
• Other sources of retirement income such as defined benefit pension plans have become much less prevalent over the past several decades.
• For tens of millions of U.S. households, there is an enormous gap between median retirement income objectives and the savings that can be used to fund those objectives: 
  • Retirement Income Needs ($42,310) - Social Security ($22,884) + Annuity ($1,430) = Retirement Income Funding Gap ($17,996 per year).

The retirement funding gap of $17,996 per year is in the range of the average Social Security benefit.  Based on current life expectancies, the amount required to finance $18,080 through retirement is in the range of $300,000.

Home equity is a natural and necessary source of cash for retirement financing because neither government nor personal savings will be capable of assuming the obligation.

With roughly 10,000 people retiring each day for the next 20 years in the United States, it’s amazing that there are not entire venture funds dedicated to reverse mortgage start-ups.