The most ignored retirement asset: Home equity
The main goal of someone when they retire is to make sure they have protected the Longevity of their money, they can maintain a Lifestyle they are accustomed, to have the Liquidity needed to maintain that lifestyle, and to leave a Legacy to their heirs. Home equity is often ignored in this thought process. If equity is considered, those four "L's" are more easily met.
As we look at the intelligent use of home equity in retirement, we must consider how the home's equity could be one of your largest assets. Most ignore this fact and say they have planned well, "why would I want to access the equity in my home, that's what I'm leaving my kids?" This is a common mistake we will analyze, because if they leveraged access to a portion of the home's equity it has been mathematically proven to have better potential to leave more wealth over and above the home's value than if it were ignored.
Here are some examples of when accessing home equity might be a good idea:
1. Perhaps there are significant funds invested in a stock where liquidating those assets would cause a large capital gain. If that asset were allowed to be passed on to the heirs the cost basis would change but they need money today. Accessing home equity proves to be a tax saving mechanism two times over; in the passing of funds to the heirs at a lower tax basis and by drawing on home equity and missing out on paying both capital gains and income tax.
2. Creating a "Stand-By" Home Equity Conversion Mortgage (HECM) Line of Credit for future use. They didn't need money today but realized that establishing this financial tool early in retirement set them up to access more of the equity in their home every month because that's how the HECM works, every month the borrower gets access to more of the equity in their home. A 65-year-old who takes out a HECM with a $300,000 house will have access to about $280,000 after 18 years. Think about the long-term care alternative this may offer!
3. Paying off an existing mortgage, eliminating a nagging monthly payment. If you are carrying mortgage debt, requiring payments, into retirement you are carrying an income requirement, too. Who knows if you will be able to meet the payment for the entire term of the loan.
4. Purchasing a home when downsizing to the last and potential Dream Home ever. Most don't know a HECM can be used to buy a home. Two scenarios play out here, those who didn't get enough proceeds from the sale of their home to pay cash for the one they want and/or those who can preserve some of the tax-free cash from the sale of that home to supplement the portfolio.
These are examples showing different retirement "fingerprints." Everyone's situation is a little different, but the equity in your home is an illiquid asset unless a financial tool like the HECM is put in place.
Ask yourself, why hasn't my financial advisor mentioned my home equity when discussing retirement and longevity? (Please call me for a concise answer)
At American Advisors Group, we work in conjunction with homeowners and financial professionals to maximize the benefit of a program that, today, caters quite well to the "mass affluent." You can design a more tax efficient strategy and create opportunities for a better retirement.
People should stop thinking about the house as the sole source of passing legacy to their heirs and start planning to leave them more wealth among all assets. The reality is, the HECM is moving from a product of last resort for financially destitute people to a strategic solution to enhance Longevity, Lifestyle, Liquidity and Legacy for affluent families in, or approaching retirement.
• Richard Glover is a reverse mortgage professional at American Advisors Group. Contact him at (847) 464-8080 or firstname.lastname@example.org