Faculty of Actuarial Science and Insurance with Gabriella Piscopo (University of Naples Federico II.)

Abstract

The financial well-being of older individuals is influenced by the stochastic nature of longevity and by changes in health status. Rising life expectancy in industrialized economies, coupled with the shortcomings of pension schemes and the burden of medical expenditures, underscores the need for suitable instruments to support retirees. Reverse mortgage (RM) contracts allow older homeowners to extract housing equity while retaining occupancy rights, with the outstanding balance—upon death—either repaid by the heirs or satisfied through the transfer of the property. Such arrangements may therefore represent a viable means of meeting consumption and care needs during retirement. We describe the decision-making problem faced by a homeowner approaching old age who must assess whether entering an RM contract is advantageous. To analyze how RMs a ect the consumption choices of older adults, we develop a life-cycle model tailored to “house-rich, cash-poor” individuals, whose main asset is real estate and who must cope with uncertainty regarding lifespan, prospective health conditions, and the associated costs of medical care and home maintenance. The lifetime utility framework incorporates consumption preferences, survival uncertainty, and bequest motives, thereby capturing how emotional and financial attachment to housing influences retirement planning. 

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