As more Americans near retirement age, they’re grappling with where they should live as they grow older. Should they stay in their existing homes? Sell and buy a smaller home? Become renters?

Although there is no single right answer, a recent, private convening of experts on aging and retirement hosted by the Urban Institute highlighted the need to think about both aging in the right place and how to pay for it.

Aging in place may prove costly or difficult

Survey after survey has shown that older Americans overwhelmingly prefer to age in place. But aging in place may require some trade-offs. Staying in a home must be financially sustainable, but it should also maximize physical, social, and emotional well-being. Financial considerations include maintenance and repair costs and the cost of necessary safety retrofits (grab bars, lifts, ramps, etc.), as well as the general cost of living in that area.

The size of the home, which drives many of these costs, must also be optimized. According to the 2017 American Community Survey, over 40 percent of seniors age 55 to 75 years, and 38 percent of seniors age 75 and older live in 3-bedroom houses, suggesting a potential mismatch between the size/maintenance requirements for the home and the needs of the inhabitants. But this doesn’t necessarily imply downsizing, as smaller, newer homes in sought-after areas could be more expensive. Rather it implies finding a place that balances multiple objectives:

• availability of the right place at an affordable price point, plus repair and maintenance costs
• access to medical facilities such as primary care doctors, in-home care, and nursing homes
• social programs that facilitate interaction
• local transportation options
• proximity to family and friends

Households will value each of these factors differently, but the eventual decision will have an enormous impact on the financial, social, emotional, and health outcomes of seniors. Aging in the wrong place for many years can lead to poor financial outcomes relative to moving out earlier in retirement. This highlights the need to educate seniors on the financial consequences of aging in the wrong place.

Ultimately, the question of whether seniors are aging in place may not be as important as asking whether they are aging in the right place.

How can we help seniors age in the right place?

Regardless of whether they choose to stay or move, most older Americans don’t have enough savings to pay for their living expenses in retirement. And more seniors are relying on mortgages: 41 percent of senior homeowners ages 65 and older have a mortgage today, compared with just 21 percent in 1989. Mortgage balances are also higher, increasing on average from $17,000 to $72,000 over the same period for the same age group.

And with people living longer, retirement savings must last longer. Participants at the convening discussed a few options to mitigate retirement costs.

In-home modifications

Researchers Michael Eriksen and Gary Engelhardt found that 3 million Americans ages 65 and older are treated for falls annually, requiring 800,000 hospitalizations and resulting in 300,000 hip fractures. The hospitalization cost is about $33,000 per stay, and the aggregate annual cost is about $55 billion, a large portion of which is undoubtedly incurred by Medicare.

As the nation’s population of seniors increases, and given the mismatch between homes and needs of inhabitants, these expenses will likely grow.

The researchers suggest a relatively inexpensive fix: in-home modifications that reduce the incidence of falls by 50 percentage points for those ages 75 and older. Every $1 invested in modifications returns $1.50 in reduced medical spending for people ages 75 and older, according to Eriksen and Engelhardt.

Of course, falls are only one small component of the overall cost of retirement. The bigger question is how to pay for overall retirement expenses, given limited savings.

Home equity products

Convening participants discussed the potential for monetizing home equity to improve retirement finances, but the lack of efficient mechanisms is a major barrier. Home equity is the major source of wealth for most elderly homeowners, including many whose available liquid assets could not cover an unexpected major expense.

Home equity loans and lines of credit are currently only available to people with the strongest credit profiles. Cash-out refinances require income to support the mortgage debt, and this vehicle is interest rate dependent; they are very costly if rates have risen substantially since the original mortgage was taken out.

Thus, homeowners with limited incomes and savings have only one option for equity extraction: the Federal Housing Administration’s Home Equity Conversion Mortgage (HECM) program, which has fallen short of its potential.

Seniors point to high costs, product complexity, fear of losing their homes, or getting scammed as reasons they don’t participate in the HECM program. In response to massive losses on HECM loans during the housing bubble, the US Department of Housing and Urban Development made several changes to HECM requirements to reduce risk. But these changes have shrunk the pool of potential borrowers and cut HECM lending volumes. Changes to program requirements have also introduced uncertainty for lenders.

Convening participants agreed about the urgency of stabilizing and improving HECM by doing the following:

• lowering costs associated with servicing HECM loans and introducing a lower loan-to-value ratio
• offering a lower-cost product for households that want to borrow a limited amount (for instance, to pay for home safety retrofits)  
• encouraging the return of the private reverse mortgages, a product several lenders have recently relaunched

But are these fixes enough? Some in favor of HECM’s current model prefer targeted changes to address issues like postassignment servicing. But others favor a fundamental reform of the program to make sure it is servicing those who need it most.

Many seniors continue to age in unsuitable or expensive homes, requiring proactive intervention from both homeowners and government. The public and private sectors can take steps to educate seniors on the benefits of aging in the right place and make changes that help more seniors do just that.

Addressing these issues will allow seniors to thrive in their chosen homes. Failure to act will only make the situation worse as more Americans reach old age.