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‘Guaranteed Income Gap’ Study Has Implications for Reverse Mortgage Borrowers

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Fidelity Research Institute has issued a new report Structuring Income for Retirement: Addressing America’s Emerging Guaranteed Income Gap. The study is yet another thorough analysis highlighting the importance of permanent income streams in retirement. Although reverse mortgages are not mentioned in the report, several of the findings are very pertinent here.

Guaranteed income, according to the report, is simply income you cannot outlive. Traditional guaranteed income sources (social security, defined benefit pensions, etc.) are dwindling in importance and will be relied on less and less by future generations of retirees. The study notes that it will be critical for retirees to find alternate ways to ensure sustained lifelong income (e.g. buying annuities, restructuring investments) or, face the very strong possibility of outliving their savings.

In the realm of reverse mortgages, the HECM tenure payment option is the closest thing there is to a “guaranteed income” source. With this payment option, HECM borrowers can guarantee a monthly income stream for as long as they live in their home - even until death. Yet surprisingly, as we have noted before, very few HECM borrowers opt for the tenure payment option (less than 5%). The HECM line of credit is by far the most popular reverse mortgage even though it has no guaranteed income features whatsoever.

The Fidelity study covers other significant retirement income challenges (some previously discussed here) including:

  • inflation risk - the risk that retirement income loses buying power over time;
  • sequence of returns risk - how the sequence of good/bad investment returns over a retirement period will impact the depletion savings
  • mortality risk - the risk that retirees underestimate their life expectancy and outlive savings
  • annuity puzzle - reasons why retirees don’t choose the HECM tenure payment options, annuities and other guaranteed income choices

    • The Fidelity study is a very worthwhile read and contains many insights helpful to people considering a reverse mortgage. We’ll have more coverage of some of its other findings in an upcoming post.

    Article Series - tenure_option

    1. Reverse Mortgage Payment Options - Are You Prepared to Self-Insure Life Expectancy?
    2. Study Shows HECM Lifetime Tenure Payment Option is Best Choice
    3. Reverse Annuity Mortgage Can Be a Sensible Strategy
    4. HECM Line of Credit Gains in Popularity Among Reverse Mortgage Borrowers
    5. Reasons Why People Don’t Choose Lifetime Payments
    6. ‘Guaranteed Income Gap’ Study Has Implications for Reverse Mortgage Borrowers
    7. More From Fidelity: Reasons Why Retirees Avoid Guaranteed Income Options
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    One Response to “‘Guaranteed Income Gap’ Study Has Implications for Reverse Mortgage Borrowers”

    1. ‘Guaranteed Income Gap’ Study Has Implications for Reverse Mortgage Borrowers | Reverse Mortgage and Loan News Says:
      September 13th, 2007 at 7:14 pm

      […] Guaranteed income, according to the report, is simply income you cannot outlive. Traditional guaranteed income sources (social security, defined benefit pensions, etc.) are dwindling in importance and will be relied on less and less by future generations of retirees. The study notes that it will be critical for retirees (more…) […]

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