How to Add Home Equity to Your Retirement Income Planning
Home equity is sometimes overlooked as a viable resource in retirement. You don’t have to sell your home to find income and liquidity.
With more retirees than ever choosing to age in place, the idea of selling your home to downsize may no longer be part of your plans.
That’s smart, because you don’t have to sell the homestead to produce retirement income and help cover the costs associated with a critical health crisis, or just the effects of aging that require outside care.
In the New York Times article The High-Class Problem That Comes With Home Equity, author Ron Lieber, the NYT’s Your Money columnist, suggests that reverse mortgages could be a good product for some retirees who want to tap the equity in their home without selling. We agree, and the Go2Income planning method can now incorporate a reverse mortgage.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
I have found that lifetime income, liquidity for unplanned expenses, lower taxes and a financial legacy are the objectives most retirees seek. When they also want to stay in their homes or age in place, I propose that annuities and home equity, added to traditional savings and investments, will best meet their retirement goals.
In our previous article, The (R)evolution of Retirement Income Planning, we presented the advantages of a plan based on investments, annuities and a home equity conversion mortgage, or HECM. Let’s dig deeper into that plan for our sample investor. You’ll see the key elements and how they can be customized to your personal objectives.
Sally’s case
Sally, 70, is focused on starting income. She has $1.5 million in savings (50% in a rollover IRA account) and $1 million in the value of her house (without any mortgage). She understands that with income annuities added to her plans, she can be a little more aggressive and wants starting income of $96,000 a year — translating to 6.4% of her retirement savings, or 60% higher than the 4% rule. (Together with her $62,000 in Social Security benefits and pension, she’s up to $158,000 in starting income.)
The following charts tell her story.
The first is her sources of income chart with Go2Income split into three sources:
- Investment portfolios: Dividends and interest from personal (after-tax) savings, RMDs and withdrawals from her rollover IRA account
- Annuities: Single-premium immediate annuity that provides lifetime annuity payments generated from personal (after-tax) savings for tax efficiency
- Home Equity2Income (H2I): HECM drawdowns until 85; QLAC lifetime annuity payments less HECM interest after 85
The product elements are allocated to accounts based in part on tax efficiency, and for Sally’s plan, less than 40% of the first-year income is taxable, with over $92,500 of the $96,000 becoming her spendable income. Also, a very large percentage of income is safe, meaning she doesn’t have to liquidate securities to realize the cash flow. Nearly 60% is safe over her lifetime.
The second chart is her projected liquidity, which may be the biggest surprise, with liquid funds to cover planned and unplanned expenses, like long-term care, modifying the house for aging-in-place necessities, etc. These funds are made up of the following:
- Investment portfolios: High-dividend portfolio (personal savings), fixed income portfolio (personal savings) and balanced portfolio (rollover IRA account)
- Home Equity2Income: HECM net line of credit
This plan meets Sally’s objectives for lifetime income, but also provides substantial liquidity for late-in-life spending — both planned and unplanned.
A reminder of the world before the evolution of retirement
It wasn’t so long ago when almost all retirees could be comfortable with income from Social Security benefits, savings and perhaps a pension or an IRA.
For most of us, pensions are now unattainable. Happily, Social Security is designed to be lifetime income, and if you worked 40 years and paid into the program, it will provide a good chunk of safe income. Your savings also might provide significant income, but investments in stocks and bonds can vary from year to year. In our prior article, we showed how each product element improved the results, in terms of income, liquidity, taxes and safety.
Another application of H2I
It doesn’t appear that we will ever go back to the days when we could retire without thinking too much about the income that we knew would flow in each month from a pension and Social Security. The (R)evolution of Retirement article, however, provides the information to help you make the decisions required by today’s environment.
When I was running the product area of a life insurance company, I knew that customers liked the lifetime protection of annuities. But some didn’t want to give up access to their funds. Back then, I got a patent on something called the Income Manager, which enabled the annuitant to cash in future payments and get access to some funds. While I can’t violate the patent, there is a need there that might be fulfilled somewhat differently:
By combining an HECM with annuities in different proportions, consumers get lifetime income (although at lower levels than Sally chose) and still maintain a large portion of savings as liquid. The available line of credit from HECM nearly matches the premium for the annuity and thus maintains most of your liquidity while gaining the annuity’s lifetime protection. We’ll explain in more detail in the next article.
Visit Go2Income Personal Planning to start a plan risk-free. You can ask one of our analysts to help you make adjustments. And then decide whether you want the peace of mind that lifetime income and greater liquidity can provide.
Related Content
- Is Your Retirement Solution Hiding in Plain Sight?
- How to Cut Your Taxes as Short-Term Interest Rates Come Down
- For Longevity Protection, Consider a QLAC
- How a Fixed Index Annuity Can Manage Retirement Income Risks
- Retirees: Worry Less About Markets, Long-Term Care and Taxes
-
Should You Be Investing in Emerging Markets?Economic growth, earnings acceleration and bargain prices favor emerging markets stocks right now.
-
I have a secret second family. Can my estate cover everyone confidentially?We asked estate planning experts how to keep this skeleton in the closet.
-
Social Security: Are You and Your Financial Adviser in Sync?Deciding when to claim Social Security is tricky if you and your adviser haven't thoroughly covered the topic. Here's how to ensure you're on the right track.
-
Are You and Your Financial Adviser in Sync on Social Security?
Deciding when to claim Social Security is tricky if you and your adviser haven't thoroughly covered the topic. Here's how to ensure you're on the right track.
-
How to Find the Best International Moving Company for Your Big Move Abroad (and Avoid Costly Mistakes)It's best to use an international moving company to protect your belongings and budget when relocating to another country. Here's how to find a reputable firm.
-
For High-Net-Worth Retirees, Tax Planning and Estate Planning Are the Main EventsTax and estate planning can have far-reaching results for wealthy retirees and are just as important as investment management. This financial adviser explains.
-
This Overlooked Diversification Tool Can Build Resilience Into Your PortfolioMunicipal bonds can provide a steady income and stability that's separate from federal shifts and global economic headwinds.
-
What Will Happen to Your Business When You Retire? How to Exit Successfully and Thrive in RetirementStepping away from work is extra challenging when you're a business owner, and a successful retirement requires planning that looks beyond the financials.
-
Beyond the Bar: Your 5-Step Guide to Discovering Whether a Lawyer Is ShadyResearch shows you can't rely on some state bar websites to vet a lawyer you're considering hiring. Here's how to check out a lawyer before you hire.
-
6 Practical Steps to Help Keep Your Student Focused on College Rather Than the Financial StrainToo many students drop out due to financial strain. This plan can help families plan for the costs and get timely aid that sees students through to graduation.
-
Are You the Doer or the Visionary of Your Advisory Practice? Here's How You Can Make the Leap to Chief Vision OfficerThe key is to transition from a tactical "doer" to a strategic "chief vision officer" by building the teams, processes and brand so your practice can grow.
