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Home equity withdrawal in retirement

  • Makoto Nakajima
  • Irina A. Telyukova

The authors study empirically and theoretically the patterns of home equity withdrawal among retirees, using a model in which retirees are able to own or rent a home, save, and borrow against home equity, in the face of idiosyncratic risks concerning mortality, health, medical expenditures, and household size and observed house price changes. The estimated model is found to successfully replicate the patterns of homeownership and the saving/borrowing decisions of retirees. They use the estimated model for several counterfactual experiments. There are three main findings. First, the model predicts that a house price boom suppresses homeownership and increases borrowing, while a decline in house prices has the opposite effect. Second, the costs of home equity borrowing restrict the borrowing of retirees, and thus a reduction of such costs (e.g., lower costs of reverse mortgage loans) might significantly raise home equity borrowing. Third, there are two implications for the retirement saving puzzle. Although the cost of borrowing against equity in the house affects the borrowing of retirees, it does not affect total asset holding, implying that equity borrowing costs do not seem to offer a quantitatively significant contribution to resolving the retirement saving puzzle. On the other hand, the magnitude of the retirement saving puzzle might be exaggerated, because a sizable part of "retirement saving" is due to house price appreciation.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 11-15.

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Date of creation: 2011
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Handle: RePEc:fip:fedpwp:11-15
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  1. Mariacristina De Nardi & Eric French & John Bailey Jones, 2009. "Why do the elderly save? the role of medical expenses," Working Paper Series WP-09-02, Federal Reserve Bank of Chicago.
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  5. Motohiro Yogo, 2009. "Portfolio Choice in Retirement: Health Risk and the Demand for Annuities, Housing and Risky Assets," Working Papers, Center for Retirement Research at Boston College wp2009-3, Center for Retirement Research, revised Jan 2009.
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  12. Love, David A. & Palumbo, Michael G. & Smith, Paul A., 2009. "The trajectory of wealth in retirement," Journal of Public Economics, Elsevier, vol. 93(1-2), pages 191-208, February.
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  15. Makoto Nakajima, 2010. "Optimal capital income taxation with housing," Working Papers 10-11, Federal Reserve Bank of Philadelphia.
  16. Karen A. Kopecky & Tatyana Koreshkova, 2010. "The impact of medical and nursing home expenses and social insurance," Working Paper 2010-19, Federal Reserve Bank of Atlanta.
  17. David A. Wise, 2004. "Perspectives on the Economics of Aging," NBER Books, National Bureau of Economic Research, Inc, number wise04-1.
  18. Eric French & John Bailey Jones, 2004. "On the distribution and dynamics of health care costs," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(6), pages 705-721.
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