Your Home Equity in Retirement
For many retirees, remaining debt-free is one of their primary financial objectives. It provides a feeling of freedom and flexibility that might not otherwise be possible with an ongoing monthly mortgage payment.
However, if most of your income is coming from tax-deferred retirement accounts such as a 401(k) or IRA, accessing extra cash for emergencies or large expenses can be costly. At times like these, keeping a home equity line of credit could prove helpful.
Here are four common scenarios where you might consider using a home equity line of credit as a source of income in retirement:
1. You need money quickly due to an emergency.
If your line of credit is already established, the turnaround time is typically quick, and the funds may even be transferred instantly to your bank account.
2. You have an unusually high taxable income year, and an extra distribution will push you into a higher marginal tax bracket.
Imagine, for example, if an additional IRA distribution would push you from the 24% federal tax bracket into the 32% federal tax bracket. In a case like this, you might consider delaying the distribution, drawing on your line of credit instead, and paying off the line with IRA distributions in a future year or years. Your wealth advisor can help you calculate if there would be a net benefit to this strategy.
3. Your cash flow is irregular throughout the year.
You might do contract work part-time in retirement that pays you periodically but need money for a home renovation right now. A home equity line of credit could cover the cost before you’re able to pay it off later in the year.
4. Your portfolio is experiencing a decline due to the markets, and your investments need some time to recover.
During down markets, it may be advantageous to generate extra liquidity from a line of credit to help cover expenses. Managing your portfolio withdrawal rate in a down market can help you preserve your capital and put you in a better overall position once markets recover.
Each of these scenarios may require a cost/benefit analysis to determine what makes the most sense both financially and in terms of your personal priorities and quality of life. You may decide that having a home equity line of credit is worthwhile, even if you are enjoying a debt-free retirement.
ABOUT THE AUTHOR
Chase Mouchet, CFP, CIMA
Chase is a Partner, Wealth Advisor in our Atlanta office. He joined legacy firm Brightworth team in 2015 as a financial planner, having previously worked at two independent financial planning firms. He is passionate about helping clients—particularly those nearing or in retirement—simplify their financial lives and maximize the impact of their wealth in areas such as charitable giving. He has been featured in Money Magazine’s Money Makeover and published in the Atlanta Journal-Constitution, the Dallas Morning News and Kiplinger. He is a member of the Georgia Planned Giving Council and the Children’s Healthcare of Atlanta Legacy Advisors. Chase received his BBA in Finance and BSFCS in Financial Planning from the University of Georgia and serves on the alumni board of the UGA Financial Planning program. Chase and his wife, Kate, live in Atlanta with their two children and are active members of their church. He enjoys spending time with his family, activities on the lake and cheering on the Georgia Bulldogs.
CONTENT DISCLOSURE
This information is for educational purposes and is not intended to provide, and should not be relied upon for, accounting, legal, tax, insurance, or investment advice. This does not constitute an offer to provide any services, nor a solicitation to purchase securities. The contents are not intended to be advice tailored to any particular person or situation. We believe the information provided is accurate and reliable, but do not warrant it as to completeness or accuracy. This information may include opinions or forecasts, including investment strategies and economic and market conditions; however, there is no guarantee that such opinions or forecasts will prove to be correct, and they also may change without notice. We encourage you to speak with a qualified professional regarding your scenario and the then-current applicable laws and rules.
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