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Baby Boomers Have Wobbly Expectations for Home Equity in Retirement

For many U.S. Baby Boomers, home equity isn’t their top source for funding retirement compared to other strategies at their disposal. This lack of intended use, however, doesn’t necessarily mean these older adults are averse to tapping into their home equity to meet retirement spending needs.

Boomers’ likelihood of utilizing home equity to support themselves in retirement depends on a variety of factors, such as their need for additional cash flow, the urgency of needed funds, as well as their attitudes toward borrowing against home equity, as recent studies and surveys of this older population have indicated.

U.S. retirees have traditionally adhered to the oft-cited “three-legged stool” strategy for retirement planning: personal savings, Social Security and employer-sponsored retirement benefits.

Self-funded savings, including retirement accounts such as 401(k)s, IRAs and 403(b)s, are the most frequently cited source of retirement income expected by workers of all generations, according to the 17th Annual Transamerica Retirement Survey.

Divided by age, older workers tend to rely more heavily on other forms of funding, such as home equity and Social Security, than their younger counterparts.

Among workers of all ages, 70% said they expect to rely on Social Security as a source of retirement income. This share is much larger for Boomer workers, 87% of which expect Social Security to be a critical funding source for retirement.

Meanwhile, home equity was less often cited, accounting for just 14% of all workers and 16% of Boomers who, along with seniors born before 1946, comprised the majority of Transamerica survey respondents at 1,576 individuals.

Rather than turn to home equity as a possible funding source, Boomers are more likely to continue working past age 65 in efforts to increase their income and bolster their wobbly retirement stools. The share of Boomers expecting to work longer equaled that among all workers at 38%, compared to 36% of Generation Xers and 40% of Millennials.

“Amid retirement savings shortfalls, American workers are attempting to prop up our system’s three-legged stool by adding a fourth leg: working during retirement,” said Catherine Collinson, president of the Transamerica Center for Retirement Studies.

“Baby Boomers are the generation that has re-written societal rules at every stage of their life,” Collinson added. “Now, Baby Boomer workers are redefining retirement by planning to work until an older age than previous generations.”

The Transamerica survey did not explicitly mention reverse mortgages as falling into the broader category of “home equity.” But if other recent studies and reports from this year can serve as any indicator, retirement age Boomers largely misunderstand reverse mortgages, or don’t understand their options for unlocking home equity.

Compared to younger homeowners, Boomers are more reluctant to borrow against their home equity, according to a survey commissioned this month by Discover Financial Services (NYSE: DFS), which revealed that older Millennials ages 30-34 are twice as likely as Boomers ages 55-64 to obtain a home equity loan. Of the 64% of Millennials who own a home, the survey found that 51% have used a home equity loan, compared to only 26% of Boomer homeowners.

“Homeowners who have built equity in their homes have the opportunity to leverage their financial asset to help them pay down debt, update their home or pay for major expenses,” said T.J. Freeborn, director of operations strategy for Discover Home Equity Loans, in a press release detailing the survey findings.

The survey, which polled 1,428 consumers, also highlighted the different purposes among Millennials and Boomers for how they use their homes.

Contrary to the expectations that older homeowners may be more inclined to leverage home equity as a financial tool, Millennials were more likely to use their home as a financial asset, either by selling it to make money, or as a quarter of Millennials indicated, using their home as an investment property.

As for the main uses of home equity loans, home remodels and debt consolidation were the top objectives cited among homeowners of all ages. Additionally, older Millennials were much more likely than Boomers to use home equity loans for emergency cash, 42% vs. 14%, respectively.

Footing the bill for home improvements and paying off debts are also some of the most commonly cited uses influencing reverse mortgage take-up, though awareness of the Home Equity Conversion Mortgage product is minute relative to its potential.

These various surveys, studies and reports underscore the attitudes of older homeowners concerning home equity and the value they place on this asset for their retirement plans. While the majority of Boomers don’t expect to rely on home equity to carry the brunt of their retirement, the response shows that home equity is at least something worth considering.