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There’s a powerful source of income hiding in your client’s house: Home equity.
Housing wealth represents the single largest asset held by American retirees, yet financial advisors often overlook home equity as a source of income for their clients.
For the average 65-year-old couple,
While there’s no shortage of advice focused on Social Security optimization, just look at some
Home equity can essentially serve five different functions in retirement: housing services, cash flow,
Home equity can also be turned into retirement income to support the homeowner’s standard of living in retirement. There are a number of ways to tap into home equity to improve cash flow. One option is downsizing. By selling their home and buying a cheaper one, homeowners can free up some home equity to spend on other retirement goals. This strategy requires the individual to relocate, though. For those who want to age in place, an option is to rent the home to generate additional income, similar to the set up in the TV sitcom “The Golden Girls.” The homeowner might not always feel comfortable sharing his or her home even if it means improved cash flow.
Another option for generating retirement income and improving cash flow is to tap into home equity through a
In the past, many homeowners stayed away from reverse mortgages because the terms were misunderstood. The most common misconception about the reverse mortgage program is that the bank takes your house after you pass away. Alex Pistone, president of Retirement Funding Solutions, a national reverse mortgage lender, has this to say about that misconception: “A reverse mortgage is just a mortgage, but with unique and flexible terms. The homeowner can make payments if they choose to, but none are required. They have all the rights of homeownership, including the ability to refinance or sell the home. The homeowner retains title and rights to the equity in the home. At time of death, the home goes to their
More than 80% of the richest clients want big asset growth later in life, according to a new UBS survey.
What this means is that the current reverse mortgage product deserves a second look by many homeowners. With a reverse mortgage, you borrow from a lender with your home as the backing. Unlike a traditional mortgage, you never have to pay back any debt that equals more than the value of the home and you are not required to make monthly payments. Homeowners keep title of the home and are able to take withdrawals in a lump sum amount, set up a line of credit or set up systematic payments in a tenure option that functions like an
If the homeowner does not feel comfortable spending down home equity as an income source, there are other ways to utilize the home value in retirement. While roughly 70% of seniors will need long-term care at some point, only about 7% of seniors have
Furthermore, home equity can also be used as a legacy asset. Many homeowners want to leave a legacy to their children. The home, as their largest asset, could be perceived as the best legacy to leave behind for their heirs. Most adult children, however, do not actually want to live in the parents’ home — they want the value of the home. In many cases, they end up selling it below market value, just to unload the asset and wrap-up the estate. This is a natural part of wealth transfer and legacy planning goals.
Diversifying retirement income is another reason to consider home equity. Many retirees rely on Social Security and a systematic withdrawal approach from an investment portfolio. However, if the market drops 30% to 40% in a year, research shows that selling investment assets at that point greatly decreases the longevity of the investment portfolio.
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Relying too much on tax-loss harvesting to generate an income is a common mistake that clients should avoid after they retire.
December 14 -
The federal exemption does not cancel out key planning matters affecting everyone at death.
October 24 -
Workers can improve the odds of getting bigger Social Security benefits after they retire by asking for a salary raise from their employer.
December 1
Setting up a
Home equity is the largest untapped resource for your retiree clients. When used correctly, it can support a more secure and happier retirement.
Of course, there is no one-size-fits-all strategy for your clients. Home equity can function differently for homeowners with different goals and concerns. When used in conjunction with a comprehensive retirement plan, it can be a saving grace for retirees who are just getting by with limited savings and Social Security benefits.
