HECMs may defuse these 4 retirement time bombs

public officials across the country are investing more of their workers’ retirement savings into private equity firms. In January, PitchBook, a news outlet for the private equity industry, said private equity returns pose a major threat to pension fund’s ability to pay retirees their promised benefits. The nonprofit  Equable Institute which works with public retirement system stakeholders warned the funded ratio for pensions has dropped from 83.9% in 2021 to 77.3% in 2022. That number is expected to decline even further in 2023. The funded ratio is the percentage of a pension fund’s assets versus outstanding current and future obligations to pension holders. 

#2 Time Bomb: Property taxes

Why in the world would anyone regret the post-pandemic run-up of home values? Because one of the unpleasant side effects of inflation is surging property taxes thanks to inflated home values. In February the National Association of Realtors reports that home prices skyrocketed 42% in the last three years. Consequently, property taxes are surging in numerous counties across America. Lending Tree data reveals from 2019-2021 homeowners in Seattle saw their median property taxes increase by 13.2%. Homeowners in San Jose California are feeling the pain as well with the median property tax climbing 14.2% during the same period. Ella Thomas, the executive director of a Cleveland community center said many senior homeowners serves are falling behind on their property taxes and are struggling to keep their homes. As a result, many municipalities are proposing varying forms of property tax relief for older homeowners spanning from freezing tax rates, deferrals, or reductions. When none of those options are feasible what is an older homeowner to do?

#3 Time Bomb: Falling home values

Next are falling home values. While today’s higher home values are spiking property taxes they have also given older homeowners a golden opportunity to extract some of their home’s value by means of various home equity loans. Whether it was a HELOC, a traditional cash-out refinance, a first-time reverse mortgage, or a HECM-to-HECM refinance many retirees or those approaching their non-working years found their home to be a welcomed source of cash. However, some spendthrift homeowners exhausted all their available loan proceeds with no thought to future payment obligations or a potential payment shock when their HELOC loan enters the repayment period. The more tragic and preventable risk lies with those homeowners who are still sitting on a mountain of equity that could either help them increase their retirement portfolio’s sustainable withdrawals or serve as a means of easing cash flow pressures. The adage ‘prepare your umbrella before it rains’ comes to mind. Today, reverse mortgage professionals find themselves attempting to sell an umbrella amid generally fair weather and light sprinkles- but make no mistake about it- the storm is coming, and that umbrella may no longer be available. 

#4 Time Bomb: Inflation

And the fourth retirement time bomb needs no introduction: inflation. Not since the early 1980s have retirees seen such a significant erosion of their purchasing power. With nearly everything we use costing significantly more than it did two years ago, older Americans find themselves particularly vulnerable to a diminished quality of life unless new sources of cash flow can be found. Solutions range from moderate to dramatic changes in one’s lifestyle or spending habits or tapping into other assets to generate the needed cash flow to fill the gap.

Additional Reading:
US pension funds are on the brink of implosion – and Wall Street is ignoring it

‘Warning signs’: PE could impact public pension plans’ funding status this year