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In years past, reverse mortgages were not always highly thought of in the financial planning process by some. But times have changed according to a report from professors David Johnson and Zamira Simkins that suggests financial planning professionals should take a closer look. According to their academic research--reverse mortgages should play an important part of the planning process for retirees' financial options. Those are loans that provide borrower's with cash payments that are figured on the equity of a borrower's home.
Their combined work was first published in the Journal of Financial Planning in March 2014 that shows that traditional retirement income methods are changing. Their work has been featured in numerous financial planning and reverse mortgage trade publications throughout the United States since it was published.
The paper assesses the current and future challenges facing retirees and explains the potential impacts current monetary policy and changes to the Home Equity Conversion Mortgage (HECM) may have on the reverse mortgage market. Nearly 80 million baby boomers are expected to retire over the next 18 years and according to their research having alternative sources of retirement income is important. Reverse mortgages are one possible alternative.
Professor Simkins has expertise in aging populations and economic issues and Professor Johnson has a background in reverse mortgages, so they decided to collaborate their research on the subject. Dave Johnson said, "We just wanted to find something that we could work on together." Johnson had been working on reverse mortgages for many years while Simkins had an eye on the aging population and their future economic needs. The subject of interest rates got them talking about taking a further look into retirement financial planning.
Their research took about a year to piece together. "There has always been a lot of misinformation with reverse mortgages," said Johnson. "That was why I got started in this area in 2005. Part of what I was doing was just to clear-up some of the misconceptions. There are so many if you go back in time, but it is getting better." The frustrating part for Johnson was that people that should have known more about this in the financial industry didn't, and there are still some negative connotations regarding the subject. "But once people know how it works, it's an option if they choose to take it. It's eventually up to them," he said.
Simkins has seen national interest in their work, including on social media. She said, "What the financial industry liked about the paper is that academic's finally took something to correct the negative P.R. that was falsely created around the topic. The paper breaks down some of the misconceptions."
With Johnson's knowledge and background in the field, they were able to answer some of the economic questions the financial industry had even before they were even asked or addressed. "We wanted to get out accurate information, as another tool for retirement planning. I thought it would show up in the Reverse Mortgage Daily, but we had no idea that it would get this kind of attention nationally. We didn't think it would have the impact it has on the financial industry."
According to Simkins, now is the time to take a much closer look at this subject due to the demographics of those nearing retirement. The days of a typical traditional retirement are no longer the norm. Simkins said, "This is now the time to take a closer look at the issue. Savings, pensions, and social security are all tools that professional financial planners need to assess, alongside reverse mortgages. You can no longer rely on 401k or social security for retirements, this paper illustrates the benefits of a reverse mortgage, that is what is making this popular."
Historically, many seniors and financial planning professionals have viewed reverse mortgages negatively and considered their use only as a last resort. However, the three legs of the traditional retirement "stool" (Social Security benefits, pensions, and personal savings) have been considerably weakened by the factors described in their research. Current and future retirees need to re-examine their views and consider including a reverse mortgage as a part of their retirement plan.
According to Johnson and Simkins the bottom line for the consumer is to understand how it works, so they have complete knowledge, so they can make an informed decision on whether they want to do this or not.
Zamira S. Simkins, Ph.D., is an assistant professor of economics at the University of Wisconsin-Superior and holds a doctorate in economics from American University.
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