Reverse mortgages have been increasingly pitched as a way to stave off the effects of so-called “gray divorce,” and a new research brief shows just how a split can put both parties’ retirement futures at risk — and how home equity benefits one demographic in particular.
Households in which at least one party had previously divorced are more likely to be deemed at risk under the National Retirement Risk Index (NRRI), a metric developed by the Center for Retirement Research (CRR) at Boston College.
“Controlling for other factors, the share at risk is 7 percentage points higher for the divorced households than for those who have never experienced divorce,” the Boston College team of Alicia Munnell, Wenliang Hou, and Geoffrey Sanzenbacher wrote in a June brief from the CRR. “To get a sense of whether that amount is big or small, consider that the Great Recession increased the NRRI by 9 percentage points. So the impact of divorce is substantial.”
The NRRI looks at the gap between households’ projected income replacement rates in retirement and the target amount they’d need to achieve a consistent standard of living, based on the Federal Reserve’s regular Survey of Consumer Finances.
By that metric, just about half of households consisting of working-aged people were at risk in 2016 for not being able to maintain their standards of living in retirement — and that’s even with the assumption that they would annuitize the proceeds from a reverse mortgage taken out on their homes.
Much has been made about the rise of “grey divorce” and its potential effects on American retirement, as the split rate among adults aged 50 and over has been rising faster than any other age group. But the BC team notes that the historic divorce rate can have just as much of an effect on seniors’ retirement futures: Divorces spiked sharply among those married in the 1960s and 1970s, they note, before flattening out somewhat starting in the ‘80s and beyond.
“The duration of marriage for the typical couple who divorces or separates is about seven years. Remarriage for divorced individuals is common; about 55 percent wed again,” the researchers note. “Even those who remarry, however, are likely hurt by divorce financially.”
The effect isn’t necessarily the same for everyone. Married couples in which one party had a previous marriage see a 9.4-percentage-point spike in their NRRI readings, compared to 7.3 for all divorcees. The risk gain for single men is lower at 5.5 percentage points — and essentially negligible for single women.
That last stat should come as a surprise for Home Equity Conversion Mortgage professionals who’ve touted the reverse mortgage as a divorce solution. The conventional wisdom says that women are disproportionately affected by divorce, as they’re more likely to have spent time out of the workforce to care for children — thus reducing their Social Security benefits. In addition, older women who married in an era of more traditional gender roles may not have a firm grasp of their husbands’ financial pictures or retirement savings levels.
But that’s actually where the inclusion of reverse mortgages in the NRRI calculation benefits women.
“Divorced single women are more likely than those not divorced to own a house — an asset that serves as a base for a reverse mortgage in the NRRI, thereby enhancing retirement resources,” the researchers wrote.
The effect of home equity can thus help erase the financial strain of raising children alone for single divorced women.
“The explanation appears to be that divorce leaves single women with two offsetting things — children, who are costly to raise, and the house, which provides a means for accumulating home equity,” they concluded.