The Changing Landscape
“Reverse Mortgages are a potential solution to the global retirement funding crisis.”
— Dr. Robert C. Merton, October 2, 2017
Dr. Robert C. Merton, a Nobel Prize-winning economist and MIT professor, has emerged as a notable advocate for reverse mortgages.
Since Dr. Merton began discussing the potential of home equity in 2015, both the program and its acceptance have evolved. Reverse mortgages have garnered attention not only from consumers but also from financial planners, researchers, and academic institutions nationwide. Thought leaders across various fields now recognize the strategic use of housing wealth as a valuable component of retirement planning, largely thanks to Dr. Merton’s influence.
The New Retirement Equation
Dr. Merton argues that many retirement strategies are based on an outdated assumption: that individuals will live only ten to fifteen years after retirement. However, people are living significantly longer, creating new challenges for portfolios, pensions, and personal savings.
He emphasizes that to sustain a modern retirement lasting 25 to 30 years, individuals may need to save one-third of their lifetime income—rather than just one-fifth or one-fourth.
Most households struggle to reach that target through savings alone.
The Underutilized Resource
That’s where home equity becomes vital.
Dr. Merton points out that for many retirees, their home is their largest asset, yet it is often overlooked in income planning discussions. This oversight is a mistake.
He asserts that when structured and communicated properly, reverse mortgages can function as a “homegrown annuity”—providing a steady income stream that can extend savings, enhance liquidity, manage taxes, or delay Social Security benefits.
“Sooner or later, to have a decent retirement, a number of people are going to have to tap into their home equity. It’s not a matter of choice. This is going to be an essential part of the foundation for funding retirement around the world.”
– Dr. Robert C. Merton
Implications for Financial Advisors
- Global attention is shifting. Countries worldwide are examining or implementing equity-release programs, and the U.S. is making strides to catch up.
- Terminology is crucial. Dr. Merton critiques the term “reverse mortgage,” suggesting that alternative phrases like “home pension” used in other countries could positively influence client perceptions.
- Integrate income tools. At MIT, he proposed combining reverse mortgages with annuities to create consistent retirement income, tapping into both a client’s home equity and actuarial efficiency.
The Conclusion
We are entering a new era in retirement planning that demands innovative thinking and the comprehensive utilization of available resources. If the idea of incorporating home equity feels unfamiliar or uncomfortable, consider this: one of the world’s leading financial thinkers not only endorses it but envisions it as essential.
If you’d like to explore how today’s reverse mortgage works and how to effectively communicate it to clients, We would be happy to guide you through some real-world examples.
- The latest annual report offers a statistical overview of the federal HECM program, reflecting the broader reverse mortgage lending landscape. In the federal fiscal year (FY) 2023, which concluded on September 30, 2023, the FHA provided mortgage insurance endorsements for 32,963 HECMs, a 50% decrease from the peak in 2021. Resource U.S. Department of Housing and Urban Development. “Mutual Mortgage Insurance Fund: Fiscal Year 2023.” Page 6.