Rayan is the COO/CFO at Fraction. Rayan is also an advisor to several PropTech startups. Previously, Rayan was the COO/CFO at Unison.
There is a retirement crisis in the United States. We know this. What we don’t know is how to solve it. There are three pillars to retirement in the United States; your home, retirement/pension plans and social security. Independently, none of these are adequate for the average American.
Retirement In America
Almost 49 million retired Americans received a Social Security benefit in June 2020, with an average benefit of $1,500. This represents over 91% of all seniors in America. Only 21% of working Americans have a pension plan at work. This defined benefit plan, where your employer promises to pay you in retirement, is different from a retirement plan that may contribute to your retirement but does not make any promises. Over the last three decades, we have seen the vast majority of private sector companies close pension plans and less than 20% of Americans work for the government.
If you are in your 60s, it is recommended that you have saved eight to 10 times your annual income, but on average, Americans have less than half that, with only $172,000 saved. The median income of retired households is $43,696, but for those households over 75, it drops to $34,925. We are outliving the insufficient savings we have.
It is estimated to maintain your standard of living and cover other items like health care, you will need 80% of your pre-retirement household income in retirement. Assuming a retirement age of 65 and looking at the median income in the decade before, this equates to approximately $55,000 a year. Given the current median income in a post-retirement household of $43,696, this is a deficit of approximately $11,000 per year. This deficit can grow larger as Americans age.
What Homes Can Do
The house is the largest portion of net worth for most Americans. Seniors have homeownership rates of about 80%. The utility of a home is different than the financial asset that is a house. In my experience working with homeowners to maximize that utility and bridge the income gap to have what they need for retirement, I believe that without major government intervention, your home can be used to create a safe, healthy and comfortable retirement.
Historically, there have been difficulties in accessing home equity without monthly payments. The primary option, a reverse mortgage, is limited in terms of home price and a borrower’s age affecting its ability to solve the problem for all homeowning retirees. There are newer options that make home equity liquid to a much larger swathe of retirees, including home equity sharing and appreciation mortgages. They each have their unique considerations, but what is clear is that assuming a reasonable 5% return on investments these gains could help bridge this gap. This gives retirees a better chance at the safety and comfort they have worked for their entire lives.
The majority of seniors are homeowners, and the many of them are mortgage-free. Utilizing housing to fund gaps in retirement income is not only attractive in that it’s a solution to the retirement crisis without the use of government support, but it also takes otherwise dormant assets and puts this money into the economy. This can help increase commerce and grow the economy.
There must be adequate safeguards in place to prevent elder abuse or putting seniors in increasingly precarious positions as they age. With these safeguards in place, financial products that help to offer liquidity to homeowners should be encouraged not just by financial advisors but also by advocacy groups for seniors. I believe optimizing the equity earned over a lifetime should not be seen as a last resort or indicative of poor behavior to get into this position. The retirement age for Social Security was set at a time when life expectancy was 61. We are living longer and healthier lives, and this is a good thing. Men retiring at age 65 today are expected to live to 84, and females are expected to live till 87. Financial innovation that enables people to live a happy and comfortable retirement is a good thing.
Governments, financial institutions and institutional investors can all play a role in making these products widely available. It’s easy for many institutions to shy away from offering products to seniors for fear of situations ending poorly and as the subject of news headlines. This is where institutional investors can encourage investment in this space, utilizing tools like impact investing or environmental, social and governing (ESG) mandates. Government can ensure that regulations protect seniors from unsavory outcomes. It is exciting and inspiring that a solution to our retirement problem is right in front of us. We can all work together to make it a success.