Vishaal B. Bhuyan - AARP Reverse Mortgages and Linked Securities. The Complete Guide to Risk, Pricing, and Regulation

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MAKING YOUR MONEY WORK FOR YOU

Maybe youre thinking its time to review your investment strategy and make the most of the money you have today. Maybe youve already built a financially successful retirement egg and want to protect what youve built. Or maybe you need to bulk up your earnings to ensure your familys future.

Welcome to money for grown-ups. Where do you turn for credible information?

Dedicated to helping you protect your assets, stretch your dollars, and bolster your longterm security, AARP can offer you powerful solutions. Whatever your strategy for managing money, weve got suggestions that will help from saving money on that next big purchase to planning your charitable giving. If youre taking your job to the next level or building up a second career, weve got strategies that will help you make your mark.

You may think your money or your financial advisor should be working harder for you. You may be watching market trends and seeing new opportunities. And, of course, you want to protect yourself and your loved ones from scams and data breaches. We can give you the support you need.

And turn to us for fun, too. (Is it time for that car, that trip, that weekend home youve always wanted?) Because that, too, is what this time of your life is about.

AARP is a nonprofit, nonpartisan membership organization that helps people
50 and older improve their lives. For more than 50 years, AARP has been serving
our members and society by creating positive social change. AARPs mission
is to enhance the quality of life for all as we age; lead positive social change;
and deliver value to members through information, service and advocacy. This
information in this book is for educational purposes and does not constitute
financial advice.

Table of Contents

Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers professional and personal knowledge and understanding.

The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisors. Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation and financial instrument analysis, as well as much more.

For a list of available titles, please visit our Web site at www.WileyFinance.com.

To FIFA
1999-2008

Preface

Over the past few years, seniors and soon-to-be retirees (Baby Boomers) have lost tremendous value in their retirement plans and especially in their home values. In addition to the depreciation of assets held by this group of Americans, unprecedented amounts of leverage used to finance their daily living, automobile purchases, and childrens educations, as well as to purchase primary and even secondary residences in many cases, have left a large number of older Americans on the brink of financial ruin.

The Baby Boomers (born between 1946 and 1960) currently comprise 26 percent of the population of the United States or roughly 78 million people. Encompassing two cohorts (people born between 1946 and 1955 make up the first cohort and the second cohort, aka Generation Jones, is made up of people born from 1956 to 1964), the Boomer generation is one of the largest and wealthiest demographics in U.S. history. According to a study conducted by McKinsey & Company, the wealth of the Baby Boomers can be attributed to three major factors:

1. Size

2. Social change

3. Education

Clearly, the sheer size of the Baby Boomers cohort allowed them to generate more income on a collective basis, being that this generation is some 50 percent larger than the previous generation. Baby Boomers have earned an estimated $2 trillion more (roughly $3.7 trillion) than the previous generation had at the same age. Moreover, the Baby Boomers were the first generation to experience a much higher number of female workers, which also meant women having children at a later age and staying in the workplace for longer periods of time. Finally, the Boomer generation was one of the most educated generations to that point, which allowed them to capitalize on many economic and technological shifts.

Despite the awesome earning power of the Baby Boomers, this group of Americans is grossly undersaved. This financial unpreparedness was merely amplified by the global credit crisis; according to the Center for Economic and Policy Research, over 18 percent of Boomers had negative equity in their homes, and Boomers ages 45 to 54 lost an estimated 45 percent of their median net worth, and those ages 55 to 65 lost roughly 38 percent.

The financially vulnerable Baby Boomers are now facing an even worse crisis, as the U.S. government borrows record amounts of debt, thus jeopardizing the Social Security, Medicare, and Medicaid programs. In the United States, Social Security and Medicare currently account for roughly 7 percent of the GDP, but within the next 25 to 30 years these programs will account for nearly 13 percent, essentially the majority of the entire federal budget as Baby Boomers move toward retirement.

The aging crisis in America, and in other developed nations such as the U.K. and of course Japan, will put tremendous strain on an already-weak federal balance sheet. In The Age of Aging, UBS Senior Economic Adviser, George Magnus, states:

The number of people aged over 60 is expected to reach one billion by 2020 and almost two billion by 2050, some 22 percent of the worlds population. In Japan, this age group is expected to double to about 38 percent of the population, only a few percentage points higher than it is expected to be in China. In Europe and America it will account for about 28 percent and 21 percent respectively. And those aged over 80 are expected to account for about 4 percent of the worlds population, four times as big as now.

He continues to write:

These changes in age structure are going to lead to significant changes in dependency, which in turn will have enormous economic and financial consequences. Dependency ratios are defined as the number of old or very young people as a percentage of the working age population, that is, those aged 15-64.

Most developing countries will still have falling dependency ratios for the next 20 years because youth dependency is falling, and old-age dependency isnt rising especially fast yet. Western countries, on the other hand, have completed the decline in youth dependency and now face a rapid increase in old-age dependency.

With so much uncertainty in the reliability of government-run social safety nets, many Americans (as well as Europeans and Japanese) must rely on themselves to generate sufficient supplemental income to maintain their standard of living, pay down debts, or someday retire. In many cases, Baby Boomers continue to take care of their retired parents and their adult children who continue to live at home. These Kids in Parents Pockets Eroding Retirement Savings (KIPPERS, as coined in the U.K.), which is a phenomenon directly attributed to the success of the Baby Boom generation, are merely further strangling a financially strapped demographic that is desperately in need of liquidity.

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