Monday, January 5, 2009

No Equity Left for Retirement

Many people have counted on their equity to fund their retirement, but now that equity is all but disappearing people either chose to continue working and put off retirement or drastically reduce their planned lifestyles. An article from MSNBC titled Retirees no longer count on home equity portrays how the housing bust has impacted retirement plans. Lets take a look -

Many Americans have recently found themselves changing retirement plans after losing a substantial amount of home equity as the housing market and the overall U.S. economy struggle. These folks face years of living on fixed incomes from pensions, 401(k)s or IRAs, and Social Security, but don't have the time to recover their losses.


The good news is about 30 percent of homeowners have no mortgage at all. So even though their properties are probably worth less now than a few years ago, these people can tap into that equity cushion if necessary.

The bad news, however, is that about one in six with a mortgage now owe the bank more than their homes are worth, according to Moody's Most of these are property owners who purchased their homes within the past few years, or refinanced their properties and siphoned off too much equity.

Choices have been difficult for Ken King, 61, who once planned to retire in his early to mid-60s. The value of his home has dropped $70,000, so he's scrapped plans to sell the five-bedroom house and downsize, because the savings won't be substantial enough to make it a smart move. He's also seen his 401(k) lose value.


Finding a smaller and less expensive home has long been relied upon to bolster retirement budgets. Ideally, profits from the sale of a larger home can be used to buy the smaller home with cash, with no mortgage, and the homeowner can pocket the rest. But the current environment of falling home values and tight credit has made home buying a selling a more difficult proposition in many markets.


However, experts such as AARP financial "ambassador" Jonathan Pond say reverse mortgages should be something of a last resort, because of high fees and the complicated nature of the loans. Reverse mortgages also mean the home will probably be sold at the end of the loan, mainly because the homeowner, or an heir, will want cash to pay off the mortgage. Seniors who want to leave their homestead to their children may not want to get a reverse mortgage.

Education is key, because of fears that reverse mortgage complexities could be used to trick seniors. To wit, the American Association of Residential Mortgage Regulators and the Conference of State Bank Supervisors established guidelines to be used starting early 2009 to review lenders and brokers selling reverse mortgages to seniors.

The plan - use the house to fund retirement. The reality - nothing left in the house so must keep working. Oh yeah, what about our 401K - nope, nothing left their either. Work, cutback or both.

Now, onto something else we are working on - the new rule of the 30% of homeowners own their homes without a mortgage. This comes from the US Census 2007 American House Survey. We will be posting our analysis of this growing myth shortly.

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