The median net worth of retirees aged 65-74 was only $266,000 in 2019, of which $240,000 was in their homes. All indications are that in the last few years, the problem has gotten worse. Bottom line, at least half of all retirees today live in fear of having to live on meager social security benefits.
The obvious remedy is to increase those benefits but there is a better approach that should take priority because it does not expand the Federal deficit. The better way is to eliminate the institutional barriers that have prevented retirees from converting the net worth they have, and especially the segment embedded in their homes, into spendable funds in the most efficient ways possible.
The core need is for retirement plans that work for the less affluent. Well-heeled retirees have access to an industry of advisors offering financial asset management services, but that industry does not meet the needs of the larger group of retirees whose wealth is largely in their homes.
The irony is that the products/programs needed for retirement plans geared to the needs of less-than-affluent retirees already exist. In addition to financial asset management, these include:
- Annuities that provides spendable funds for life.
- Home equity conversion programs that convert home equity into spendable funds. These include loan-based programs, where the retiree borrows against the house (HECMs), and equity-based programs, where the retiree sells part of the home equity and/or its appreciation.
The problem is that these programs are delivered by specialized providers: financial asset managers manage assets, insurance companies offer annuities, reverse mortgage lenders offer reverse mortgages, and home equity purchase firms purchase home equity. None of them guide the retiree on how the different components can fit together into a coherent retirement plan. The result is that enormous synergies are unrealized.
The retirement plan needed to realize these synergies includes appropriate integration technology, effective delivery structures, competitive prices, integrity guarantees, and the removal or avoidance of implementation barriers.
The needed technology generates the optimum plan for any retiree. In so doing, it takes account of the retiree’s age, financial status and preferences to find the best combination of the different plan components. These include alternative versions of HECM reverse mortgage and equity participation plans, alternative payment deferment periods on annuities, rate of return assumptions, and adjustment methods if the realized rates turn out higher or lower than those assumed.
Given the complexity of the process, it is critical that the technology allows retirees to see graphically how the integrated components would provide spendable funds and estate values every month through at least age 104. Such graphical displays allow retirees to compare and select from alternative versions of their plan.
Allan Redstone and I have developed the technology that meets these specs. An illustration for a hypothetical retiree can be seen at Integrated Retirement Plan Illustration. Any retiree visiting that site can see a version there that applies specifically to them. There are no ads to distract them. We intend to make this functionality available, in their own name and free of charge, to any other web sites that want to offer the service to retiree clients.
The delivery structure needed to implement the plan begins with a program coordinator (PC) who is responsible for the plan. The other participants are lead sources who establish initial contact with retiree clients, and advisors who consult with and offer advice to retiree clients.
Among other things, the PC provides and supports the technology, trains and supports advisors, and is responsible for providing competitive prices to retirees who use the plan. PCs are also likely to be lead sources.
Competitive prices on both annuities and HECM reverse mortgages market are a major challenge to an effective retirement plan. In the current markets for annuities and reverse mortgages, prices charged vary widely on transactions that are otherwise identical. This reflects their complexity and novelty – very few retirees transact more than once, so there is little opportunity for them to learn how to shop these markets.
To deal with that problem, an effective retirement plan would employ networks of annuity providers and reverse mortgage lenders who post their prices in an effort to generate more business. A PC would manage these networks but there is no need for more than one. Allan Redstone and I have already developed such networks that we would make available to prospective PCs.
Integrity guarantees needed to generate the confidence of retirees would be provided by PCs. These should include the following:
- Advisors are required to provide the best terms offered on the networks unless the retiree prefers a different provider.
- HECM reverse mortgage lenders and annuity providers acting as lead sources providing their own HECM or annuity would be required to post their prices on the plan’s networks.
- Lenders and investors would not receive any part of annuity commissions, and licensed annuity providers would not receive any revenue from HECM lenders or investors.
- The retirement plans must be demonstrably superior to any stand-alone combinations of the same basic features.
Implementation barriers are formidable but surmountable. HECM reverse mortgage lenders are deterred by fear of violating HUD rules that are antithetical to annuities. Annuity providers won’t write annuities that have been financed with reverse mortgages. Federal Government assistance programs measure economic need by income rather than by net worth, which is the appropriate measure of economic need of retirees. Many financial advisory firms denigrate annuities which reduce the financial assets of clients on which their fees are based.
The retirement plan features described above have been thoroughly vetted by counsel to assure compliance with relevant statutes and regulations. The other impediments will fall away as the benefits of retirement plan integration become widely known.