By Arun Muralidhar

There is a growing retirement crisis and most of the focus has been on the fact that individuals are not saving enough for retirement, may not have access to pension schemes, and find it difficult to choose from a wide range of retirement products. One solution that has been considered is to improve access to Reverse Mortgages (RMs) so that individuals can convert their (possibly) single largest asset into a through-death income stream. However, current RMs are complex with constraints on who can use them, and with multiple parties to the transaction to hedge residual risks. As a result, a limited number of institutions (and that too with government support) offer such products. These challenges may have also limited the use of RMs for the typical individual saving for retirement and are unlikely to solve the larger crisis. We suggest a new approach – “Retire In-Home” (Retire through Income from one’s Home) – that leverages recently proposed tradeable instruments to improve retirement security and hedge against standard-of-living risks. These include a bond called BFFS/SeLFIES, designed to secure real retirement income for a fixed term (with potentially a second new bond, called a LIVE bond, designed to protect individuals against longevity risk if individuals do not want to purchase deferred annuities because of annuity challenges). Further, the paper also shows how a new investor segment could be tapped to expand financing for such transactions as recommended by Prof. Robert C. Merton.

This paper demonstrates how Retire In-Home could simplify this market and allow even the most financially unsophisticated individual to participate in this transaction. The paper works through three cases: (a) when death is known (or a term income); (b) when longevity risk is hedged with deferred annuities; and (c) when longevity risk is hedged with LIVE Bonds. The paper concludes with extensions including accounting for up-front lumpsum payments, forward-starting contracts and even multi-occupant situations.

Source: SSRN