Five advisors explain what it takes to retire by strategically using their home equity, Social Security payments and other financial assets.
John H. LeBlanc, CFP, Back Bay Financial Group Inc.,Boston
A topic that has become common in many conversations with clients related to retirement cash flow has been “downsizing the house.”
Many clients had previously thought about this as an option to free up cash in retirement (by buying a less expensive home) while also reducing their retirement expenses, because usually a smaller home or condo results in lower utility bills, lower taxes and insurance , etc.
It is not unusual for a client (usually located in the Greater Boston area) to still have a lot of equity in their home if they purchased it a number of years ago and regularly paid down the mortgage.
While there may be emotional issues related to leaving a home that they may have lived in all their lives, seen their kids grow up there, etc., the financial benefit can be great and frequently will allow for a better lifestyle in retirement with a smaller or less costly home.
In addition, those clients who had planned to downsize and move to a warmer climate, such as Florida, can benefit from housing there that has lost significantly more value than homes in the Northeast.
While their home in Boston, for example, has probably lost some value, it doesn’t compare at all with the fire sale prices that homes can be purchased for in Florida at the present time — so the downsizing and moving may even more beneficial than previously.
For clients who live in Massachusetts who move to Florida, they also save on state income tax and state estate taxes.
Given that housing in the Boston area sometimes makes up 50 percent or more of a client’s net worth, a discussion about the locked equity in a client’s home is frequently a topic for discussion related to reaching their financial goals.
Malay Vasavda, CFP, MBA, Quantum Financial Management LLC, Glenview, Ill.
One helpful strategy I have utilized to increase a retired client’s cash flow is by doing what is called a “Social Security buyback.”
The Social Security Administration allows you to repay all of the benefits you have received up to this point and re-file for benefits at your current age.
The client I used this strategy for started taking benefits when she was 62. She is single with no spouse or children. She has no legacy needs, and cash flow was her most important need.
She has built up a modest portfolio, but she mostly lives off her pension and Social Security and does not withdraw funds from her portfolio very often.
She is the prime candidate for this type of strategy, because it involves making a large withdrawal from the portfolio upfront in order for her to have an increase in retirement income with an inflation adjustment each year.
She also received a tax credit for the taxes she had paid on her prior contributions, so it cushioned the initial payment amount a bit.
By doing this, she still had a good amount of funds left in her portfolio, but she is able to have a larger cash flow buffer each month, which has increased the chance that she will not need to withdraw funds from her portfolio in the near future.
In essence, this was like purchasing an inflation-adjusted fixed annuity, without the administration and other fees associated with purchasing an annuity from a private party.
Martha J. Schilling, AAMS, CRPC,ETSC, CSA, Schilling Group Advisors LLC, Dresher, Pa.
If you wonder where the money went, place an envelope in your pocket or purse and insert each receipt for one week into the envelope. If it’s a cash item and you don’t have a receipt, mark the amount on the envelope.
Tally everything at the end of the week.
Think of it as shopping for money.
Continue for a month to garner more info: If your month is longer than your money, you are living beyond your means.
Focus on discretionary items to reduce or eliminate spending.
Grow your emergency fund to cover two years of shortfall that Social Security and any other income (pension and/or an annuity) does not cover.
Don’t be satisfied with money-market rates, ladder CDs and short-term bonds to garner an additional gain in yield. Bond ETFs and closed-end funds can provide monthly income; preferred stock and MLPs can contribute timed payouts quarterly.
Rita Cheng, CRPC, CFP, Ameriprise Financial, Bethesda, Md.
For clients who have excellent credit, substantial equity and liquid reserves, it may make sense to open a HELOC (home owner’s equity line of credit).
For these clients, they have enough liquid reserves to pay off their house, but they may want to maintain liquidity. In addition, they may not want to incur the fees associated with refinancing, because they owe less than $100,000 on a 15-year note.
In this situation, I worked with the client to apply for a HELOC on their primary residence. The market value was $600,000; total outstanding mortgage was $94,000 on a 15-year note with an interest rate of 5.25%.
The original mortgage balance was $140,000. The principal and interest payment is $1,125.43.
The client applied for a HELOC of $150,000 and will use the proceeds to pay off the remaining mortgage balance of $94,000.
The client has absolutely no other consumer debt.
The benefit: The client still maintains liquidity. The interest-only payment on the HELOC is only $273.56.
The client will pay more than the interest-only payment. He may pay an additional $500 per month.
The benefit to the client is that the previous principal and interest payment was $1,125.43, and the new principal and interest payment is $273.56 + $500 or $773.56. He has the benefit of additional monthly cash flow.
As a result, he doesn’t have to withdraw as much from the qualified accounts, thereby reducing taxes and ensuring the longevity of his portfolio.
Should rates rise in the future, the client has more than enough liquid reserves to pay off the HELOC.
I did tell the client once he decides to pay off the HELOC that he should not close the HELOC. Paying off the HELOC is different from closing.
This strategy may not be for everyone, but it works for the client and his unique situation.
He gets the benefit of lower interest rates and lower payments, while maintaining flexibility and liquidity.