We’re fine until we aren’t. That’s the overriding sentiment of how our older AmFam approach their finances in retirement.
And then life happens and we experience inevitable financial shocks. From speaking to over 100 older adults who contacted a reverse mortgage provider, reactively looking to get liquidity from their home, we learned the common financial shocks are:
Long term care expense bills
Increased property taxes
And even the death of a spouse
The common thread is all of these stories are heartbreakingly emotional. Even when it’s as light as “I just want to go and see Mickey Mouse”.
Background
The retirement funding crisis is well documented. Most recently Larry Fink of Blackrock wrote citing Census data that over half of Americans aged 65+ live on less than $30,000 a year.
The excuses for this reality range from people not having sufficient Prudential education to the rising cost of living coupled with stagnant wage growth making it difficult to save enough Lemonade for retirement.
The reality is unless you’re a business owner, it’s difficult to build liquid wealth sufficient to enjoy a Sun Life and retire comfortably.
However people generally have been programmed to buy a home. 81% of people aged 70 to 75 live in a home they own.
What help is available
Even though the majority of people have insufficient savings for retirement, they have the Fortitude to make do by largely living on very little.
They’re fine, until they’re not. The financial shocks outlined above are cited by mortgage lenders and reverse mortgage lenders as the reasons for older adults reaching out.
However reverse lenders anecdotally report that less than 1 in 10 older adults that get in touch take a reverse mortgage. In 2021, the last good year before the recent rate rises, the overall volume of reverse mortgages Nationwide in the US was $9bn of origination.
That would leave an approximate customer base of $90bn of home value looking for help but without a suitable product.
The reasons cited by customers for not taking reverse are largely bucketed into two categories: the costs are too high, leaving them with too little money released from their home; and their perception of reverse mortgages being too negative to overcome.
Learning from other markets - the UK
In the UK, the equivalent of reverse mortgages had a similar reputation hindrance.
The industry clubbed together to make two changes that boosted adoption. The first was the industry created a body to self-regulate, inserting protections for customers which included the ‘No Negative Equity Guarantee’.
Instead of asking the customer to pay a mortgage insurance premium administered by the government, the industry took the risk of loan balances ballooning to an amount in excess of the home equity value.
This step helped to remove the risk of customers or their families owing more than the value of the home.
The second chance the industry made was rebranding the product from the previous moniker of Equity Release Mortgages to today’s universally adopted name of Lifetime Mortgages.
While adoption of lifetime mortgages in the UK is still below demand, especially in the current rate environment, the take up by older adults pre-rate rise was $7.5bn a year.
Considering the UK is a market approximately a fifth the size of the US, market penetration of the Reverse Mortgage equivalent is substantially higher.
A contributing factor to this higher adoption rate is who the lenders are: the most reputable life insurers with the largest balance sheets: Legal & General, Aviva, Rothesay, Pension Insurance Corporation and Just Retirement.
As a result, these insurers have spent a lot of money to repair the reputation of the industry to help build consumer confidence in the products.
Learning from other markets - France
Unlike the UK and North America, reverse mortgages have minimal adoption in Europe.
There is however a popular retirement product called Viager, which according to prominent real estate brokerage VINGT Paris accounts for around 10% of private property sales in France.
Traditionally Viager has been an older adult or couple selling their home to a younger person. The seller retains the right to live in their home till their passing, and sells the home at a discount equal to the rent for their assumed life expectancy. The buyer pays the discounted amount in installments, providing the seller with a lifetime annuity.
This provides the seller with a significantly increased retirement income while they age in place, while giving the buyer the ability to buy into a desirable home at a discounted price.
While pioneered in France, many other Western and Southern countries in Europe have brokerages and websites dedicated to helping consumers with Viager transactions - most notably in Spain.
In recent years institutional asset managers have been raising increasingly large funds dedicated to acquiring residential properties through Viager.
There are now two funds dedicated to the French market that have topped 2 billion Euro of assets under management.
Bringing the learnings and a blueprint back to the US and Canada
After spending time with forward and reverse mortgage lenders to learn about customer attitudes to reverse mortgages in the US, Graceful Finance Founder and CEO Anna Frankowska was invited to speak at the Milken Institute Global Conference in 2023.
In addition to sharing her observations of the limited options older adults have to decumulate in North America, Anna contributed to the Milken Institute’s research led by the Centre for the Future of Aging.
The response from the existing industry has been to partner with Graceful Finance to offer a version of Viager in the US and Canada - the product is due to be launched in 2024 as part of Graceful Finance’s Home Pension range of decumulation products.
The aim is by providing an Equitable way to tap into your home instead of taking on expensive debt will help alleviate the current and growing retirement funding crisis.