Academic journal article Journal of Financial Counseling and Planning

Mortgage Holding and Financial Satisfaction in Retirement

Academic journal article Journal of Financial Counseling and Planning

Mortgage Holding and Financial Satisfaction in Retirement

Article excerpt

Introduction

Overall, debt levels are increasing among Americans, and the use of debt remains widespread until late in the lifecycle (Lusardi & Mitchell, 2013). A recent analysis by the Consumer Financial Protection Bureau (CFPB) (2014) noted a trend of older Americans carrying more mortgage debt into retirement, accumulating less home equity, and having difficulty making monthly mortgage payments. As a result, foreclosure rates among older Americans have increased, and mortgage debt is increasingly threatening retirement security (CFPB, 2014). The rise in mortgage debt contrasts conventional wisdom, as previous generations of retirees were once encouraged to enter retirement free of debt, especially related to housing.

This adage aligned with using debt during younger years and relying only on income sources during retirement to meet expenses. Many practitioners rely on this standard, as Rose (2013) listed a mortgage as one of the five debts that can ruin retirement, and Moss (2014) indicated that a paid off mortgage before retirement was a key to retirement happiness.

Although the trend of mortgage holding in retirement may be disturbing, the availability of borrowing options may provide some households with additional strategies to maximize lifetime wealth. Specifically, in today's period of historically low mortgage interest rates, holding housing debt in retirement may be rational in order to maximize expected household resources (Smith, Finke, & Huston, 2012). This discussion is often driven by the objective financial benefits of borrowing for leverage purposes (Webb, 2009). Leverage is a financial strategy that focuses on resource maximization and the objective financial benefits of borrowing at relatively low interest rates to reinvest the proceeds to produce a higher return. However, employing this strategy in retirement involves significant risk, as Kitces (2011) compared the risk of not prepaying an existing mortgage to using a margin loan to invest in stocks; a risk arbitrage position regardless of the type of debt instrument. Consequently, voluntary mortgage-holders should be cautioned that investment returns and future performance are not guaranteed when weighing the options of prepaying a mortgage based on current market returns (Financial Management Concepts, 2014). Evidence suggests that relative risk aversion does not increase in retirement (Wang & Hanna, 1997); therefore, older individuals may be willing to accept leverage risk when retaining a mortgage in retirement.

Leveraging assets may make financial sense if the investment rate of return exceeds borrowing costs, yet this approach is not without financial and psychological risk. Psychological costs are often associated with carrying debt that may lead to unintended consequences for a retiree's financial satisfaction (Brown, Taylor, & Price, 2005). Some practitioners identify the prepayment decision as both financial and emotional, and not merely mathematical (Fuscaldo, 2014). Therefore, given the prevalence of retiree mortgage debt and the potential for financial and psychological harm related to holding mortgage debt into the retirement years, the purpose of this study is to evaluate the relationship between holding mortgage debt into retirement and financial satisfaction. An understanding of the psychological effects associated with this specific type of debt in retirement may further inform mortgage policy and assist financial planning practitioners in advising older Americans and those contemplating retirement.

Literature Review

Financial Satisfaction

Financial satisfaction is a subcomponent of overall well-being (Plagnol, 2011) and focuses on similar elements of general well-being such as being worry-free (Joo, 2008). Well-being is a term that encompasses an individual's contentment, satisfaction, or happiness with their situation (McDowell, 2010). A high sense of well-being impacts an individual's quality of life (Andrews & Withey, 1976). …

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