The real costs of ignoring home equity

Asset blindness is reducing older Americans’ quality of life and standard of living. For some it means working into perpetuity- for others, it’s retiring with a lower standard of living than they had in their working years.

The percentage of older Americans remaining in the workforce is increasing. The number of workers aged 55-64 now exceeded pre-pandemic levels according to a May 2024 Employee Benefits Research Institute report. This is not surprising considering the rapid increase in the cost of living in the last three years as inflation ravages consumers’ pocketbooks.

Today older homeowners representing a broad swath639461e of income brackets are grappling to decide if they can realistically afford to retire or remain in the workforce. This choice is particularly relevant for peak baby boomers, or those born between 1959 and 1964 who are just turning 65 this year. Over half of Peak Boomers have $250,000 or less in assets increasing the need to draw from retirement savings.

More than ever before older workers are grappling with the question, “Will I have to work until I die to make ends meet?” Sadly, for some, the answer is “yes”. However, many older Americans are unnecessarily returning to the daily grind unaware of the solution that’s literally right over their heads.

Yet, many of these well-intentioned and hardworking homeowners would never consider tapping into their largest asset- their home. The substantial equity in the home is often ignored because the parents intend to pass it on to their adult children. However, as we discussed last week most adult children will sell the home they inherit within a few short years.

Asset Blindness

Well-intentioned inheritance plans often create a sizable blind spot when accounting for one’s assets. This asset blindness is especially harmful to more than half of Americans with an annual income of $30,000 or less. This cohort would be your atypical ‘needs-based’ reverse mortgage borrower.

However, inheritance concerns aren’t the only reason many are blind to their accumulated home equity.  The blinders placed on many financial advisors are another. Many financial professionals are prohibited from discussing or recommending reverse mortgages with many companies going as far as to scrub their advisor’s emails for any reference to the loan.

A 2021 Pew Research Center study underscores how this prohibition is a disservice to financial professionals’ clients. Pew found that the typical retirement account balance was $76,000 while the average home equity was $174,000. But let’s say a household has $250,000 in total retirement savings. For example, a couple needs $4,000 each month to meet their living expenses but only brings in $1,800 in Social Security benefits. This leaves a gap of $2,200 that must come from savings or income.

Assuming they don’t return to work their nest egg would only last a little over nine years- not accounting for investment returns, interest earned, or inflation. Being blind to the potential utility of their largest asset this couple will have exhausted their savings and may have to make some very unpleasant financial decisions.

The consequences of asset blindness can be devastating for older American homeowners. The question is- when will the financial community recognize this and take corrective action?