Boomers Will Need to Tap Home Equity, not Bequeath It.

Last Updated Mar 10, 2010 12:49 AM EST

So much for leaving the house to the kids. According to the Center for Retirement Research at Boston College, more and more Americans will need to use their home as a retirement ATM, wiping out a key component of many estate/inheritance plans.

For the first time ever, the National Retirement Risk Index compiled by the CRR@BC shows that post-crash more than half of Americans may not be able to maintain their standard of living in retirement. The CRR researchers define "at risk" as anyone whose projected retirement income will fall at least 10 percent short of supporting their pre-retirement income.

Source: Center for Retirement Research at Boston College

Alas, the 51 percent at risk today is deceptively optimistic. The CRR@BC calculation assumes that retirees will tap their home equity via a reverse mortgage to generate retirement income. But currently just 2 percent of retirees have used a reverse. If future retirees choose not to monetize their home equity, the Retirement Risk Index jumps to 61 percent overall, and even crosses over the 50 percent threshold for high income folks.

The 10 percentage point increase in retirement risk attributed to not tapping home equity is actually more than the impact of the 2008 market crash, which was measured to have increased retirement risk by seven percentage points. While there has indeed been massive erosion in home values during the bubble's deflation, the fact is that many homeowners are still sitting on plenty of equity, and that asset will likely need to become part of the retirement planning conversation. Here's the CRR's take:

How baby boomers and future cohorts use their home equity will have a significant impact on how well they fare in retirement. Today, very few homeowners have a reverse mortgage. However, protecting home equity may be a luxury that future retirees can ill afford as Social Security replaces a smaller share of pre-retirement incomesand people rely increasingly on meager 401(k) balancesrather than on traditional pensions.

This also has implications for subsequent generations. If Gen X and Gen Y stand to inherit less, it just ramps up the need to be saving more today for retirement.

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