This is the sixth article in the series. In this piece I will answer questions 9 and 10 of 32 very important questions people need to answer before retiring.
- Do I plan to use equity in my home for retirement?
This is a tricky and delicate question. In our practice, when developing a retirement scenario for a client, we start with the assumption that you will not use the equity in the home for retirement needs. That is another way of saying that hopefully you can leave the house to the kids. Lots of times, that scenario does not work. There are three ways to get at the equity in your home for retirement needs. The first is to sell the home, and buy a smaller, less expensive one and take what is left and invest for retirement income. This does not happen often. Most of the folks I know just buy a smaller but better home in retirement that costs as much as the one you sold, if not more.
Another option is that you can borrow some money for retirement on your Home Equity Line of Credit (HELOC), if you have one. If you don’t, you better get one before you retire, even if you think you don’t need one. . Hopefully your HELOC amount that you can borrow is a big number. You will have to pay at least interest every month. At some point the HELOC converts to a regular mortgage and you will have to pay principle and interest every month. If you only need a little extra money every once in a while in retirement, the HELOC may work for you.
The last option is a Reverse Mortgage on your home. If you need regular income from your home to make retirement work, and plan to live in it until you die, this is probably your best option. If you are a homeowner age 62 or older, you can borrow a significant portion of the equity in your home (the amount varies with age) and not have to ever pay it back if you live in your home until you die. The amount you borrow compounds with interest every year and becomes payable only upon your death or if the home is sold before that time. Taking out a Reverse Mortgage is serious business. Talk with a Reverse Mortgage specialist to understand how they work. Then run, don’t walk, to a Certified Financial Planner Practitioner acting as a fiduciary to crunch some retirement numbers for you. If you do decide in favor of a Reverse Mortgage, please make sure that your children know your plans. Better yet, involve them in the process. Their input may be valuable.
- If I needed to use that home equity in retirement, would I?
Most folks want to leave something to their children, and most often that is the home. That will be tough to do if you need to access the equity in your home for income in retirement. How do you know? This is where a written, comprehensive and well designed retirement plan comes in. Retirement is one of the biggest financial decisions that you will make in your life. My biased opinion is that most people do not have the ability to craft their own retirement plan and know the odds of its success. It is also my opinion that a heathy percentage of Americans that retire in the future will need to access the equity in their home to make retirement work. Please have a Certified Financial Planner Practitioner acting as a fiduciary craft a comprehensive, written financial plan for you that will give you a good idea of the odds of a successful retirement. If the numbers look real good, your kids will likely get the house and maybe some other assets. If the numbers tell you that you must use your equity in your home to make retirement work, then hopefully your kids don’t need an inheritance. If the numbers are a little shaky, this is where the decision gets tougher to make. Would you compromise your Retirement Plan A and go to Retirement Plan B to assure an inheritance for your children? You need to have very good information before you make that decision, preferably way ahead of the time you may need the money. You need to know what Plan B looks like. Then you choose.
In my next article I will answer the following questions: 11.What is my income now?; 12.What are my expenses now?; and 13. What will my expenses be in retirement?
If you have a question for me, I can be reached at mike@McNamaraFinancial.com. I promise that I will respond. If you missed any of the previous articles in this series, they can be found at my website McNamaraFinancial.com
Michael J. McNamara Ph.D., CFP®
CERTIFIED FINANCIAL PLANNER™
*Any financial advice in this article is intended to be generic in nature. Readers should consult with their own financial advisors before implementing any advice or suggestions above.