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News and Features: Features

Dream deferred

After a lifetime of work, older Americans are now delaying retirement, going back into the workforce, and cashing in on their homes so they can make ends meet.

BY: Jack Sullivan
Issue: Fall 2011/The American Dream Special Issue

for ann jones, the clerk-teller’s position she landed at the Registry of Motor Vehicles in 1984 was her shot at the American Dream. Jones had worked a few jobs, gotten married, and had a son. But the Registry post offered her job security and the chance to buy a house, earn a pension, and retire comfortably.

“My plans were to stay [at the Registry] and retire and sell my house, live somewhere warm,” says Jones with a soft, sardonic laugh. “It didn’t work out that way.”

Jones achieved many of her goals. She bought a two-family house in Dorchester and, in 2007, retired after 23 years at age 60 with a $1,400-a-month pension. But her mother’s stroke, her father’s funeral, and the cost of caring for her 45-year-old son’s multiple sclerosis quickly ate up much of her income and depleted her savings. To make ends meet, Jones, who divorced years ago, abandoned her dream of a sunny retirement, took equity out of her home using a reverse mortgage, and began working 20 hours a week as a bus monitor with hearing-impaired students in Boston.

Her situation is typical of many retirees these days. Retirement assets such as homes and 401(k)s have taken body blows from the recession. Less than a quarter of American workers have enough money in a 401(k) or similar defined contribution plan to be able to live comfortably in retirement. Seniors are entering retirement with twice as much debt as they did just 15 years ago, and a survey by the Pew Research Center last year found that more than 41 percent of adults say they have had to steal from their retirement by withdrawing money from their savings, 401(k), or retire­ment account in order to pay bills.

With Americans living longer, many seniors are running the numbers and deciding either to put off retirement or to combine work and retirement. In Massachu­setts, the senior stampede to work is startling. According to research by the Center for Labor Market Studies at Northeastern University, the total number of workers 65 and older increased by 64,000, or 63 percent, between 2000 and 2010. It’s not the picture many painted of what life would be like when they reach the magical age of 65.

“It’s a reflection of this lengthy recession, the severity of this recession,” says Barbara Anthony, the state’s undersecretary for consumer affairs and business regulations, whose office oversees a number of agencies dealing with elder issues. “A lot of people did all the right things—they worked hard, they saved money. But a lot of people had things happen that they couldn’t control. The enormous expense the retiring generation is now facing is something the generation before did not face. Even if you’ve done everything right, you may end up today at 65 or 67 and not be able to retire.”

The big shift

It wasn’t too many generations ago that people worked until they could no longer physically perform. In the late 19th and early 20th century, employment pensions were unheard of. Workers, generally men, stayed in their jobs literally until death or illness forced them out. The average length of retirement was about two years, and there were few social safety nets available.

Government made retirement an achievable part of the American Dream, first in the 1930s with Social Secur­ity and then in 1965 with the introduction of Medicare, which provided older Americans with health benefits. These government backbones, supplemented by pension and other benefits provided to workers by businesses and unions, transformed retirement into a stable, secure time of life. For years, the average age of people in the workforce dropped steadily as more and more families saved and planned for retirement, secure in the fact their government and employer provided for their golden years.

But, as economic volatility forced businesses to scale back their benefits and government to pile up enormous deficits, retirement has become a much less secure period in life. In the private sector, growing unfunded pension liabilities have prompted companies to reduce benefits or drop their pension plans altogether and shift to 401(k) plans, which put more of the burden on workers to save for retirement. The federal government has already raised the full retirement age for Social Security to 66 for those born between 1943 and 1954 and to 67 for those born after 1960. For those born between 1955 and 1960, the age falls between 66 and 67 depending on the birth year.


When Loretta Webb, right, joins her husband Jerry in retirement, the couple will use North Carolina as their
legal residence because of what they deem to be tax advantages there for retirees.

Social Security is under fire and a central theme of the presidential election, with candidates calling for changes to its benefits and structure to keep the system solvent. Mix all this uncertainty with a three-year recession that has decimated savings and retirement accounts, and you’re left with a lot of anxiety as workers are being forced to juggle shifting expectations about how long—and how well—they will live. “The landscape of retirement has really shifted,” says Andrew Eschtruth, associate director at the Center for Re­tirement Research at Boston College. Retirees today “are really in a different kind of world than their parents were. There’s more risk and responsibility for their own retirement.”

According to the US Bureau of Labor Statistics, the average length of retirement for men 65 and older in 1980 was 17 years between ceasing work and their death. Last year, it was 19.5 years and by 2050, with the increase in life expectancy, the average length of retirement is projected to be almost 22 years. Eschtruth says most workers are not prepared for such a long period of need.

“A healthy couple age 65 retiring today faces a 50 percent chance of one of them living to 92,” he says. “We’re very concerned with the twin risk people face [if they] spend too quickly and run out of money, or hang onto it too tightly and diminish their quality of life. If people want to maintain the same living standard they had when they were working, they have to work a little longer.”

Eschtruth says another option is to combine part-time work with retirement. “It’s going to become increasingly common,” he says. “There are advantages to working later in life: better health, better mental acuity, psychological benefits. And as we move from an industrial-based economy, there are a lot more service-sector jobs and white-collar jobs than there were a generation ago that are not as physically taxing. Certainly, you’re going to see a lot more 70 year olds [in the workforce] than you did a generation ago.”

But all those working 70-year-olds are having a generational side-effect. As they move into the workforce, they are crowding out teenagers and young adults trying to break into the workforce, making it difficult for them to launch their work careers. The Northeastern study that found a 63 percent increase in the number of workers in the state over 65 also found the number of workers age 16 to 19 had dropped by 45,000 during the last decade, or roughly 28 percent.

Reverse mortgages

As retirees scramble to fill the money gap between the funds they have and the funds they need in retirement, they are beginning to turn to an investment source once deemed untouchable: the family home. Rather than paying a bank interest or letting a paid-off home sit untended, a growing number of seniors are turning to reverse mortgages to tap into the equity they’ve built up over decades of payments.

It’s simple and alluring: That house you’ve spent years —as much as half your life—pouring money into can be turned into your own ATM machine, generating the cash you need for retirement.

A reverse mortgage, most of which are issued though a government-backed program called Home Equity Con­version Mortgages (HECM), works one of three ways: as an annuity where the borrower receives a monthly check; as a line of credit that can be drawn down as needed; or as a lump sum payment. When the borrower dies or moves, the house is sold and the loan is repaid. Though the use of reverse mortgages has exploded in the last decade, they still represent just 2 percent of all mortgages. Peter Bell, president and CEO of the Reverse Mortgage Lenders Association in Washington, DC, predicts growth will accelerate as people start to wrap their heads around the concept that they are sitting on a pile of cash that is theirs to spend.

“Acceptance of reverse mortgages requires a sea change in thinking,” says Bell. “For many years, the home was sacred; many people still recall the concept of the mortgage burning party. Taking on a new loan at this stage of life requires a different thought process. Seven or eight years ago, our borrower was typically a 78-year old newly widowed homeowner.

“Today it is as likely to be a couple as a newly widowed [woman], 62 and 63 year olds today, younger folks who are being forced into retirement earlier,” says Bell. Some experts say it’s gone from a small, targeted program aimed at assisting low- and moderate-income elderly retirees who have outlived their money to remain in their homes to one that is entrapping anxious workers just entering retirement who don’t understand the long-term ramifications.

Bonnie Heudorfer, a consultant and researcher who authored a study last year on reverse mortgages in Massa­chu­setts, says she saw—and still sees—similarities to the subprime mortgage scandal that played a big part in the recession.


Source: Federal Reserve Board, Survey of Consumer Finances. Based on the mean of the middle
10 percent of households headed by an individual 55 to 64 years old.

“The heavy-handedness in how some of these loans were being sold, some of the same behaviors that got us into the subprime crisis was being used here,” she says. “Before the crash, most of the reverse mortgages were for people who were house-rich and cash-poor and needed to draw on their equity for basics. It went from being a very, very niche market to being sold by Fonzie and Robert Wagner on TV commercials and all those people saying [seniors] could take trips, buy things they always wanted. They were being sold as lifestyle enhancements.”

Through the 1990s, reverse mortgages, available only to people 62 and older with a certain level of equity, represented a tiny portion of the overall market for mortgages, especially in Massachusetts. But beginning in 1999, the number began to grow rapidly, reaching a peak in 2007 but slowing down again in the past few years as home values dropped, erasing much of the equity people had built up. According to the Department of Housing and Urban Development, more than 720,000 reverse mortgages have been issued nationally with more than 90 percent of them still outstanding.

In Massachusetts, there are more than 17,000 active reverse mortgages with the vast majority issued after 2001. According to HUD data compiled by Heudorfer for a study she authored for the Massachusetts Community and Banking Council, reverse mortgages are disproportionately issued in Barnstable County, where more than 48 percent of homeowners are older than 60, the highest ratio in the state. Nearly 12 percent of reverse mortgages in the state have been made in Barnstable County, eclipsed only by Middlesex and Plymouth counties where less than one-third of homeowners are older than 60. Barnstable County’s share of reverse mortgages, however, is, by far, the highest per capita in the state.

Ann Jones bought her Dorchester home in 1998 for $97,500, and it is now appraised by the city at $290,000. After remortgaging the home several times over the years, Jones was struggling to make the payments. She took out a reverse mortgage, using the lump sum to pay down her larger conventional mortgage. She then refinanced the balance of her conventional mortgage, reducing her monthly payment so she could afford to continue living there.

“I didn’t want to lose my house, I wouldn’t have had a place to stay,” says Jones. “I have nowhere to go.”

Jones’s strategy lowered her monthly nut, but it also erased her biggest asset. A reverse mortgage is generally a one-time option. Once you’ve tapped the equity, it’s gone and compounding interest eats away any increase in value the house may gain over time and usually closes out any options of tapping into it in the future.

“If you take out a reverse mortgage in your 60s and you live another 20, 25 years, you have to make sure that money is going to last,” says Anthony.

Advocates say anyone interested in a reverse mortgage must carefully read the fine print. Interest on reverse mortgages taken as an annuity or a line of credit is accrued at a variable rate on the amount withdrawn, not the total amount approved. But with the lump sum version, interest begins compounding immediately on the full amount and keeps the total rising. The lump sum is attractive to someone pinching pennies to pay for fuel or food, but it also poses a temptation to spend it all, a temptation that salesmen prey on.

“It’s targeted to a very vulnerable population,” says Len Raymond, executive director of Homeowner Options for Massachusetts Elders (HOME), a nonprofit advocacy group that counsels seniors about mortgage options. “People have to look very hard and carefully at this. We’re not crazy about them in general. They’re intended for highly individualized circumstances. For some people, it might be a great thing for them. For a significant number of people, it might not be the best option, and for many, it might even be outright dangerous.”

While many homeowners are under the impression they are safe from foreclosure, the fine print says otherwise. Homeowners are still required to pay taxes and insurance as well as maintain the home’s upkeep. If, as many find, they lack the money to be able to do that, they could be in “technical default” and have the mortgage foreclosed.

Raymond says he has encountered plenty of elders from all walks of life in that situation. “If it sounds too good, if it sounds too terrific, it probably is,” says Raymond. Some of the rules covering reverse mortgages are still being clarified. The AARP this summer filed two class action suits against banks alleging they defrauded the heirs of an estate by demanding they pay off the balance of a reverse mortgage before taking title to the home. The heirs say they should have the same rights as a surviving spouse and be able buy the home at fair market value, even if it is less than the loan amount.

Anthony says she met with a group of elders in a community recently and many of them said one town administrator urged them to take reverse mortgages out to help pay for a senior center. Anthony says none of the homeowners did, labeling them “savvy.” But she says not everyone understands the risks. She declined to identify the community.

While both federal and state governments require counseling for borrowers, Massachusetts will require face-to-face counseling beginning next year. Currently, counseling only has to be done over the phone to satisfy the requirement. In addition, Massachusetts will become the only state that requires reverse mortgage counselors to be certified by the state. Now, states simply accept federal certification.

Bell, the Reverse Mortgage Lenders Association president, says the angst over high-pressure reverse mortgage pitches is overblown and feeds into the negative perception of the product, which can be a useful tool for seniors struggling to make ends meet even though they have an asset readily available.

“Longevity is forcing people to spend down the equity,” he says. “It’s just a reality that we need to deal with. As people live longer, our parents are going to need more to finance their own needs. This notion of passing the house on is sort of an outmoded notion.”

The only party to a reverse mortgage transaction that doesn’t face any risk is the lender, who gets his money back through the sale of the home and, if the value is below the loan amount plus interest, is made whole by the federal government. The federal guarantee wasn’t a major issue as long as home values kept rising, but once the recession hit and home values dropped 30 percent and more, suddenly the sale of a home was inadequate to pay off the mortgage and the government paid the difference bet­ween the sale price and the loan balance.

In fiscal 2010 and 2011, when the initial effects of the housing market crash were being felt on reverse mortgage loans, the government paid out at least $1.1 billion to cover lenders’ losses. As of January, HUD estimated that $7.3 billion of the $76 billion in guaranteed reverse mortgages were underwater. Beginning this year, HUD started tacking a surcharge on mortgages as insurance against the shortfall but many wonder if it is too little too late. “You have to wonder if it’s a good deal for the government—and taxpayers,” Heudorfer says.

Stretching the dollars

Jerry and Loretta Webb pack up their belongings after a three-week vacation on the Cape in their fifth-wheel trailer. For Jerry Webb, 66, it is just another day in his long-anticipated and relished retirement after 35 years as an emergency room physician assistant. For Loretta Webb, it is practice for when she can join her husband in retirement in 4-½ years when she turns 62.

The couple now lives in Fairfield, Maine, though Jerry Webb is a Holyoke native and lived in Woods Hole until 1970. He says he has “an honest to goodness pension” that sustains him and they buy family health coverage through his wife’s insurance plan. “Medical insurance is going to kill us,” says Loretta Webb, who works as a transcriber in the medical field.

The Webbs’ post-working plan is simple and complete: When Loretta retires, they will sell the house in Maine and spend six months on the Cape in their trailer and six months in North Carolina, where they will likely buy a small home—possibly a park model that many call a mobile home—that can accommodate them and their dog, Enif, named after the brightest star in the constellation Pegasus. For Jerry Webb, it’s a no-brainer.

“Maine is not a retirement-friendly place,” he says. “In North Carolina, they leave the pension and Social Security alone. There’s the cost of heating, living up here in the cold. They have a warmer climate, less tax structure. I think we will end up there.”

The Webbs are looking at what faces most people, though few go through the trouble to plan how and where to best maximize what are, for many, finite resources to last a lifetime. While the Webbs say staying in Massachu­setts for half the year is attractive, they do not want it to be their base of operations because of what they see as the high cost. Statistically, however, Massachusetts ranks closer to the top than the bottom in many retirement analyses. Like North Carolina and 34 other states, the Bay State does not tax Social Security or government pensions nor does it tax public pensions from those states that do not tax Massachusetts residents. The Kiplinger Report ranks Massachusetts as one of the country’s 14 most pension-friendly states.

In addition, Massachusetts offers a “circuit breaker” program that lets seniors 65 and over write off a portion of their property taxes for their residences on their state income tax returns. Many communities are also now offering the chance for seniors to volunteer working for the town in exchange for reduced property taxes. There are breaks available on auto insurance and other tax abatement programs, though HOME’s Raymond points out just 18 percent of seniors take advantage of those.

There are other programs, such as an interest-free $25,000 home improvement loan program from the city of Boston that does not have to be repaid until the home is sold. Again, says Raymond, few seniors are aware or take advantage of the benefit. Anthony points out Massa­chusetts has the “18-65 law” that requires banks to allow people under 18 or over 65 to open one free checking account without fees, except for a $5 returned check fee.

Part of the allure in being able to stay in Massachusetts after retirement is the chance to remain close to other family members. As people live longer, they need more help physically, fiscally, and emotionally.

But even with those options available, many seniors run through their money early and are down to looking for loose change in the sofa cushions a decade into retirement with another decade or more to go. For many who go back to work, it’s not a matter of keeping busy but a matter of survival and, in some cases, a blow to their late-life plans.

Donna Pavloski understands the dilemma. Pavloski, who declines to give her age, retired from her commercial locksmith business, where she employed 10 people, early in life to enjoy what she thought would be a relatively brief but fulfilling retirement. With her family history of illness and what she thought was a short life expectancy, Pavloski, who never married, decided traveling was the best way to spend her time, but after 25 years on the road, she had to get a job.

Pavloski lives in an RV, spending her summers at Adventure Bound Camp Resort in North Truro and packing up in the fall for the warmer weather climates in the winter. This year, her destination is Texas, though in the past she’s parked in Florida and other retiree-friendly states for the winter.

At the Cape RV resort, Pavloski works part-time on the front desk in return for a small paycheck and reduced rent, an arrangement that more and more retirees—called “workampers” in the industry jargon—are turning to in order to supplement their desire to travel. For Pavloski, and an increasing number of retirees, it’s a simple matter of math. “I have outlived my money,” she says matter-of-factly. “I never suspected I’d live this long.”

Illustration by Shout.

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