Many retirees die with considerable personal net worth, suggesting that these retirees are not depleting their savings as they age, as one might expect. Many of the studies that have tried to explain this “retirement savings puzzle” are based on standard life-cycle models of savings behavior. According to these studies, retirees retain their savings for various reasons, including uncertainty about future health and longevity; planning for future medical expenses and long-term care costs; and the desire to leave bequests to their children or others.1

In their working paper “Home Equity in Retirement” (2019), Nakajima and Telyukova study another explanation for the retirement savings puzzle: homeownership.2 The authors point out that, unlike a financial asset, owning a home provides both financial advantages and satisfaction or “utility.” The financial advantages of homeownership include home price appreciation, the home mortgage interest deduction, and borrowing against home equity. The utility benefit arises from consumption services provided by a house and emotional attachment to a house.

The authors begin by presenting descriptive statistics of U.S. homeownership and savings in retirement. They compare the net worth between homeowners and renters starting at age 65. There is a distinct difference between these two groups—homeowners have flat or increasing net worth while renters exhibit asset decumulation across all age categories.

They also measure what happens to net worth when homeowners switch to renting at various ages—as may happen because of substantial medical expenses or the death of a spouse. Homeowners who sell their house decumulate assets quite dramatically across all age groups, while those who remain homeowners exhibit flat or increasing net worth, irrespective of age.

Nakajima and Telyukova build a structural model of savings and housing decisions in retirement to understand the importance of homeownership in explaining retiree savings behavior. Their data, which come from the Health and Retirement Study for the period 1996 to 2006, allow them to track retiree life-cycle patterns of asset holdings and health.3 These data include information on housing assets, other financial asset holdings, debt profiles, use of home equity, retiree income, access to social insurance programs, medical expenses, and marital status.

In their model framework, retirees can choose to either rent or own a home, and homeowners can access home equity by either selling their home or borrowing against their home — which may be possible depending on their age and debt profile. Individuals face uncertainty with respect to their own health and their partner's health, medical expenses, and longevity. Bequest motives can also influence their savings behavior in retirement.

The authors use their model to evaluate the effect on retiree savings decisions associated with the extra utility from homeownership, the equity they can borrow from their home, and house prices. They also evaluate the relative importance of medical expenses and bequeathing wealth in savings decisions. Additionally, the authors analyze a “hidden channel of asset accumulation” that can occur by deferring home maintenance.

Their modeling exercises show that for retirees who own a home, a large part of their savings is tied up in their house as an illiquid asset. Dissaving occurs slowly because homeowners prefer to stay in their house during retirement for as long as they can to take advantage of both nonfinancial and financial benefits of homeownership; the housing boom of 1996–2006 was an especially important motivator.4 In addition, the authors show that retirees find it more difficult to borrow against their home as they age. This also contributes to older households ending up with more savings, which mostly consists of their housing assets after they exhaust their financial holdings.

Their empirical work shows that housing-related channels account for 28 to 44 percent of retirees’ median net worth (depending on age), which significantly contributes to homeowners not quickly drawing down their savings in retirement. Also of relevance in explaining the retirement savings puzzle, the authors estimate that “warm glow” bequest motives account for 7 to 28 percent of net worth in retirement (depending on age), while the contribution of medical expense risk explains another 4 to 26 percent of net worth (also depending on age). Overall, older and higher-income households care more about leaving a bequest, while younger retirees care more about having savings to pay for potential future medical expenses. Nevertheless, the role of housing in slowing down the speed of dissavings is strong across all age groups in retirement.

Also, the authors find that when retirees fail to maintain their home, it represents a significant channel of asset accumulation, with the percentage of homeowners choosing not to maintain their home increasing with age. In their sample, about 15 percent of the homeowners in the 75–85-year-old cohort choose not to maintain their home, and by age 95 that rate almost doubles. Under-maintenance gives some homeowners in retirement an alternative to selling their home by freeing up financial resources. Nonetheless, less money spent on home maintenance accelerates a house's depreciation, which means a lower house sale price for these homes compared to sales made by younger homeowners.5

Nakajima and Telyukova successfully expand upon the simple life-cycle explanations of retiree savings by identifying the importance of housing assets and characterizing the motivations for homeownership in retirement. Their study contributes to the understanding of retirees’ savings patterns throughout the retirement years and the divergent paths that exist between homeowners and renters. This understanding is important for policymaking because individuals in the U.S. and other countries—particularly individuals that rent their home—do not always have sufficient savings for retirement. Better information on why people save or dissave helps policymakers to design targeted policies to encourage appropriate levels of saving to support life after retirement.

1 For more information on these non-housing-related determinants of retiree savings behavior, see Michael D. Hurd, “Mortality Risk and Bequests,” Econometrica, 1989, 57 (4), pp. 779–813; and Mariacristina De Nardi, Eric French, and John B. Jones, “Savings After Retirement: A Survey,” Annual Review of Economics, 2016, 8, pp. 177–204.

2 The views expressed in the paper are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Philadelphia or the Federal Reserve System.

3 The Health and Retirement Study (HRS) is a biennial longitudinal survey conducted by the University of Michigan. The authors’ sample includes those who were age 63 and older in 1996 and who reported being retired (either partially or fully); their sample spans 10 years.

4 This finding is consistent with the work by Steven F. Venti and David A. Wise, who report, based on an AARP survey, that retirees desire to stay in their home for as long as they can. (“Aging and Housing Equity: Another Look,” in David A. Wise, ed., Perspectives on the Economics of Aging, Chicago: University of Chicago Press, 2004, chapter 3, pp. 127–175.)

5 This was also the conclusion reached for homeowners older than age 75 in a study by Thomas Davidoff, “Maintenance and the Home Equity of the Elderly,” unpublished manuscript, 2006.