Most retirement planning methods have ignored what for some retirees is their largest single asset — their home. That means the plan may fail to deliver on one or more of the five things retirees want:
- Don’t run out of money
- Grow income each year
- Leave a meaningful legacy for kids and grandkids
- Increase spendable income by reducing taxes
- Build up a source of liquidity for unplanned or unfunded expenses
With the addition of the new HomeEquity2Income (H2I) program described in this article, Go2Income now covers over 90% of all retiree asset classes. H2I uses the equity in your primary residence to fill in the gaps in your plan that otherwise might require insurance that you don’t qualify for, higher-risk investments, or more aggressive assumptions as to yields and returns in your plan.
Starting with this article and continuing over the next month or so, we’ll cover the why, what, and how of the HomeEquity2Income program.
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First, the “why” of H2I.
Overlooked area of wealth
One major area of wealth for retired investors is the value of their residence, less any mortgages or home equity loans. A report by the Joint Center for Housing Studies of Harvard University shows that for high-income retirees, an average of 23% of their personal wealth resides in the value of their primary residence. Put another way, there is $47 trillion in total home value, according to Redfin — and that is up 19% from two years ago. Higher-value homes worth $250,000 to $750,000 posted the largest gain of 4% in the last year.
The issue is whether to unlock that value and, if so, how best to do that. There are multiple ways to unlock, like selling or renting the house, a home equity loan (HELOC) or a home equity conversion mortgage (HECM). Our planning view is to consider, where possible, all major asset classes available to the retiree; however, selling or turning your home into a rental property is beyond our pay grade.
Regarding HECM, while I understand a built-in reluctance to mortgage (either forward or reverse) your primary residence after retirement, it’s an option that can address several worries about income, long-term care and staying in the home you love.
What is an HECM, and what does it offer a homeowner?
The term HECM is still not widely recognized, and the purpose of the product is not always understood. Plenty of definitions exist, but for the most up-to-date, I consulted with our artificial intelligence tool, ChatGPT. Here’s what it says:
A home equity conversion mortgage (HECM) is a type of reverse mortgage backed by the Federal Housing Administration (FHA) that enables homeowners age 62 or older to convert a portion of their home equity into cash.
- HECM allows homeowners to access a portion of their home equity without needing to sell their home or make monthly mortgage payments.
- Homeowners can choose how they receive the funds from the HECM, whether as a lump sum, monthly payments, line of credit or a combination of these options.
- Unlike traditional mortgages, borrowers are not required to make monthly payments. The loan is typically repaid when the homeowner sells the home, moves out permanently, or passes away.
- HECM loans are insured by the Federal Housing Administration, providing additional protection to borrowers.
- Borrowers can continue to live in their home as long as they meet the loan obligations, such as maintaining the property and paying property taxes and homeowners insurance.
- HECM loans are non-recourse loans, meaning that the borrowers or their heirs will never owe more than the value of the home at the time of repayment, even if the loan balance exceeds the home's value.
HECM funds can be used for various purposes, such as supplementing retirement income, covering medical and long-term care expenses, home renovations or paying off existing debts. (ChatGPT’s words, but my emphasis.)
As to the first point, HECM can be set up to provide periodic cash flow to the investor — and that can be tax-free. Properly designed interest paid on a line of credit can be tax-deductible.
Thus, an HECM offers a way to access home equity to improve your financial situation without the burden of monthly mortgage payments. Still, I would consider it only one option in retirement planning, not the sole solution.
Unmet needs in planning
In earlier articles, we’ve discussed unmet needs and wants that occur even with the most diligent planning. For example, very few plans fully contemplate the costs of an extended health crisis. According to Genworth Financial, an insurer that does regular surveys on the expense of long-term care, you can expect to pay monthly costs of at least $1,690 for adult day health care, $5,148 for a home health aide and $9,043 for a private room in a nursing home facility. That last type of care costs more than $100,000 per year.
As regards the wants, with the price of college skyrocketing, you may decide to fund more of these costs for your grandkids through your 529 plan. And then there are the costs of renovating or modifying your residence if you, like most others, want to “age in place.”
An example of this planning dynamic is the family we visited on Thanksgiving in my article How Finances Can Improve for Retirees — and the Next Two Generations. That family thought they had a plan worked out to serve the interests of three generations, until they investigated long-term care insurance and realized how expensive it is. Every family contends with both current and future unmet needs. The difference is in how you approach them.
Before we describe how we assembled the H2I solution, I will again list the why:
- Equity in your home is an overlooked area of wealth
- HECM can be a suitable component in your plan
- You should plan for unmet financial needs and wants
Create the H2I solution
Our new approach, called HomeEquity2Income, or H2I, can become (1) a source of additional retirement income that is lifetime, tax-efficient and safe and (2) create additional liquidity late in retirement. It can work either as part of a Go2Income plan or as a stand-alone H2I program.
At Go2Income, we discovered that for optimal efficiency, we should combine lifetime annuity payments with an HECM for tax-free drawdowns early in retirement and include a line of credit for later-in-retirement unplanned expenses. We also realized that, with a properly designed approach, we could address multiple regulatory issues.
You get one thing — liquidity — with an HECM. You get another — lifetime income — with an annuity. One particular annuity that we favor is a QLAC. Visit our QLAC calculator to get a free quote.
When you put them together, the combination provides lifetime income and the cash resources you might need to pay for expensive outlays like health care not covered by Medicare.
As usual with Go2Income, you get to choose the combination that best suits you and your family.
The benefits that H2I generates
In future articles, I will discuss how to use H2I as a stand-alone program and then how to integrate it into your Go2Income plan. Before we end this article, let me give you an example of the benefits H2I delivers for our typical investor — a 70-year-old woman with $2 million in savings and $1 million in home equity.
- $20,000 of tax-free cash flow growing to $27,000 by age 85
- $27,000 of lifetime income at 85
- $700,000 of liquidity at age 90
To repeat myself, your circumstances and solutions will be different. But you can get started now. Order your own complimentary Go2Income plan to learn more about how to use the equity in your residence to create more retirement income and to create a new source of liquidity.
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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
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