Robert C. Merton,
Reverse mortgages have been quickly gaining a foothold with financial advisors. One of the latest acknowledgments comes from a Nobel Laureate, who claims reverse mortgages are promising retirement strategies.
Reverse mortgages can be a key asset in helping retirees all over the world fund their retirements, according to an Advisor Perspectives article featuring comments made by Robert C. Merton, professor of economics at M.I.T., who was awarded the Nobel Prize in economics in 1997 for his contributions to the Black-Scholes option-pricing model.
“One of the biggest global issues is how to fund retirement,” Merton states. “It is faced by every country—large and small.”
While the good news is people are living longer, active lives today than ever before, funding this kind of longevity presents a set of challenges as implications of longevity shift from a 40-year working career and a 10-year retirement, to a 40-year career and 20-year retirement. We feel the new standard is working for 45 years with a 30 year retirement.
“The implication, approximately speaking, is that we must save 33% of our working earnings for retirement instead of 20%,” writes Advisor Perspectives. “Without reverse mortgages, the alternative, Merton said, is to reduce consumption or work longer.”
For many in the working middle-class, the most valuable asset—and perhaps only major savings—is the home in which they live. Thus, reverse mortgages are “ideally suited” to unlock that wealth.
“The house should be viewed as an annuity while you live in it and a financial asset that ultimately gets sold,” the article writes. “A reverse mortgage gives up the financial asset when one doesn’t need it, in order to pay for other expenses during retirement that you do need.”
Merton, who believes that reverse mortgages are going to be “one of the key means of funding retirement ” in the future, believes the challenge is to implement the loan cost effectively and efficiently through communication and marketing.
As for the common criticism that reverse mortgages deprive heirs of their parent’s home, Merton urges retirees to prioritize maintaining their own standard of living above the idea of leaving an estate.
“It doesn’t help if you can’t make it through retirement without your resources,” he said. “This is about having enough to have a decent retirement.”
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