This sage advice of Benjamin Franklin highlights the fact that the basic strategy for ensuring retirement security has changed little over the past 200 years. The traditional formula is simple: accumulate assets during one's working years and systematically draw down these assets after retirement. In recent years, however, more and more Americans are finding it difficult to save enough for retirement from earnings. The dramatic fall of the stock market has exacerbated the problem, reducing retirees' personal wealth by an estimated $3.5 trillion in the past two years (Ernst and Young 2003).

These trends are troubling at a time when rising longevity places seniors at greater financial risk due to a chronic illness or disability. In our faltering economy, however, there is one bright spot—home equity continues to rise. Average home equity in the United States increased more than 8 percent between 2000 and 2001 (Joint Center for Housing Studies of Harvard University 2002). Many households age 62 and older have substantial amounts of untapped housing wealth, including families whose other retirement resources may be very modest. With an estimated $2.1 trillion tied up in home equity, this financial asset has the potential to dramatically increase the ability of seniors to pay for long-term care at home.

Unlocking illiquid assets such as housing wealth requires us to look more closely at asset decumulation in retirement. Typically, elders sell their home to access the equity they have built up over time. When they move to a more appropriate living situation, the sale of a house can be very beneficial. Those elders who are forced to sell their home to pay for long-term care, however, could face serious problems. Relocating often entails the loss of familiar activities along with support from family and friends. This can reduce quality of life and accelerate cognitive decline (Bassuk 1999). For physically or mentally impaired elders, a better approach would be to use the equity in the home to purchase services and devices that could enable them to stay at home. A new type of financial tool—the reverse mortgage—can help older Americans achieve this goal.

Little work has been done to examine the role of reverse mortgages in managing the financial risk of long-term care among older households. This paper will address this issue by examining the use of reverse mortgages to help impaired elders continue to live at home. It will also identify the potential links between reverse mortgages and long-term-care insurance. The research presented here is part of a study conducted by the National Council on the Aging, which is funded by grants from the Robert Wood Johnson Foundation and the Centers for Medicare and Medicaid Services. The analysis is based on the 2000 Health and Retirement Study and data from the housing and mortgage industries. In this study I focus specifically on households where the youngest homeowner is at least age 62, since this is the minimum age to qualify for a reverse mortgage.

The results of this research suggest that liquidating housing wealth through reverse mortgages can play an important role in improving the way we pay for long-term care in this country. Elders who need assistance activities of daily living (ADLs) or instrumental activities of daily living (IADLs) have, on average, substantial amounts of home equity that could be used to support informal caregivers and purchase a meaningful amount of services to promote aging in place.

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