Reverse Mortgages Can Be A Retiree's Saving Grace

Are you concerned about how we will fund retirements in the future? Professor Robert C. Merton gives his thoughts on this global challenge.

The Reverse Mortgage: Core Issues of Design Structure, Marketing, Funding and Valuation

There is a serious global challenge in funding retirement. The sources of potential non-sustainability of the current retirement systems are several: Shifting demographic distribution in the USA, Europe, Asia and parts of Latin America have populations aging rapidly; increasing longevity in which people of all ages are expected to live longer; as economies shift from rural agriculture to industrial city; legacy of large unfunded liabilities from defined – benefit and pay-as-you-go pension plans caused by long-time overly optimistic return-earning assumption and inadequate contributions; contribution and balance sheet and contribution risks that are simply too big for plan sponsors to accept.

There are only four ways to improve the chances for achieving a good retirement: 

  • Save more for retirement and lower lifetime consumption level
  • Work longer before retiring
  • Take more risk and be prepared for the consequences if the risk is realized
  • Improve the income benefits from the assets that are already available from saving for retirement

This lecture explores one such approach that has the potential to significantly improve the income benefits from existing assets in many countries: the reverse mortgage. The focus is on the design structure to be effective, the marketing of the product, providing large and reliable funding sources for it; and its valuation and risk assessments. The analysis provides an illustrative case for applying the tools of modern finance to help solve a major financial economic challenge.


Robert C. Merton is University Professor Emeritus at Harvard University and was the George Fisher Baker Professor of Business Administration (1988–98) and the John and Natty McArthur University Professor (1998–2010) at Harvard Business School. He is currently Resident Scientist at Dimensional Holdings, Inc., where he is the creator of a global integrated retirement-funding solution system that addresses the deficiencies associated with traditional defined-benefit and defined-contribution pension plans.

Merton received the Alfred Nobel Memorial Prize in Economic Sciences in 1997 for a new method to determine the value of derivatives.

Published 13. October 2015

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