Your Home Equity in Retirement

Your Home Equity in Retirement

Chase Mouchet, CFP®, CIMA®  | Wealth Advisor

For many retirees, remaining debt-free is one of the primary objectives of their financial life. It provides a feeling of freedom and flexibility that may not have otherwise been possible with an ongoing monthly mortgage payment.

When most of your income is from tax-deferred retirement accounts, however, accessing extra cash for emergencies or other purposes can be costly. Other distributions may create a tax snowball and remove additional assets from tax-deferred accounts. For retirees whose home equity and tax-deferred accounts (such as a 401(k) or IRA) make up a large portion of their net worth, keeping a home equity line of credit could prove helpful when extra cash is needed.

Here are four common scenarios in retirement where keeping a home equity line of credit could make sense:

  1. You need money quickly due to an emergency.
    If your line of credit is already established, the turnaround time is typically quick and will likely link to your bank account.
     
  2. You already have an unusually high taxable income year, and an extra distribution will push you into a higher marginal tax bracket.
    Considering a delay in a retirement distribution, even if you intend to take a lump sum to pay off the note, could help you save on taxes if looking ahead into multiple tax years. For example, an additional IRA distribution could push someone who is typically in the 24% bracket into the 32% federal bracket if not planned for, which could be a meaningful difference for your tax bill.
     
  3. Your cash flows are irregular throughout the year.
    In this scenario, the issue is timing more than affordability since you expect to cover the cost entirely after the gap period. If you do contract work part-time in retirement, you may get paid periodically. If you have a cash need, such as a home renovation, you may need to cover that cost before you are paid. 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 for a required expense. Managing your portfolio withdrawal rate in a down market is especially important. If you’re able to keep it lower, you may be in a better overall position later once markets recover.