Your Home Equity in Retirement
How can a line of credit help you in retirement? From paying expenses and reducing taxes to smoothing income and protecting your assets, read on for more.
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
Chase is a Partner, Wealth Advisor in our Atlanta office. He started his career at two smaller firms before joining legacy firm Brightworth in 2015 as a financial planner. He is passionate about helping clients, particularly those planning for life after Corporate America, simplify their financial lives and enhance the impact of their wealth in areas such as charitable giving. Chase has been featured in Money Magazine’s Money Makeover and published in the Atlanta Journal-Constitution, the Dallas Morning News, and Kiplinger. He has been actively involved with the Financial Planning program at his alma mater, the University of Georgia, having served on the program’s Alumni Board as member and President. Chase and his wife, Kate, live in Atlanta with their children and are active members of their church. In his spare time, you’ll find him enjoying time outdoors with his family, coaching youth soccer, and cheering on the Georgia Bulldogs.
