5 Quick Reasons Why YOU Should Use Home Equity In Your Retirement Plan

by Daniel J Turner NMLS#1016716; Geneva Financial LLC NMLS#42056

Copyright 2020 Daniel J Turner. All rights reserved.

In today’s uncertain economy, the thought of ceasing your life-long effort of working for your daily bread and living the rest of your next 30-40 years on what you’ve saved is more than daunting. It might even be crazy. “Popeye the Sailor” can go into a fight with one arm tied behind his back (and WIN), but, that’s a cartoon. And, it’s just not a very rational strategy for about 95-96% of us.

The facts are staring you in the face…wide eyed and clear…If you aren’t using home equity in your retirement plans? (Unless you’re really very wealthy) you’re making a mistake that won’t make itself known until it’s too late for you to change the course and survive.

 

Here are 5 reasons (quickly) why you fit the profile of those who wisely use home equity to secure and structure their retirement…for reasons you’ve probably never heard of, or thought of.

 

1. You have more equity than you have retirement savings. You’re “asset rich, and cash poor”.

This is true for over 96% of the US nation-wide home-owning population over age 62. Remarkably, 90% of all retiree’s have anywhere from $2.00 to $5.00 of home equity for every $1.00 of retirement savings. If you own a home, and you have at least 50% equity in it? You home can be your bank. Ask yourselves–Is your home a shrine for your children? Or, is it a pile of money shaped like a house?” (By the way- Life Insurance is a customary way of canceling mortgage debt. If you don’t own any? Buy some. It’s very cost efficient.

 

2. Running out of money during your retirement is NOT an option for you and your Spouse!

According to Economists Barry Sacks, PhD, CFP and his brother (Stephen) Sacks, PhD, adding home equity profoundly enhances and lengthens the odds of living a better lifestyle without risk of having “the talk” with your financial advisor about unpleasant yet necessary income reductions and changes in your lives when you’d rather be free living your best remaining lives. “Luxury (once enjoyed) becomes necessity.”

According to “The Sacks’ Boys”, using home equity in a retirement plan extends the risk of portfolio exhaustion from ages 84-86 well into the mid 90’s! Their product of choice? The FHA HECM HELOC with a 1 year annual reset. This study was published in 2012 in the “JOURNAL of FINANCIAL PLANNING” and submitted to FINRA. It was so profound in its proof that FINRA was forced to change their stance from the Reverse mortgage being the “Loan of Last Resort” to the absolute first thing to consider when making your financial retirement plans! Google it!

 

3. You realize the importance of annuitizing your wealth into life income streams, but you’re deeply reluctant to let go of the comfort, control and freedom that money provides.

Retiree’s do live more comfortably with income streams, but they’re hard to create. Once the funds are converted? You forfeit all future access to what those funds could do. If you require Long term care? The income feeds the Medicaid Spend down requirements. Not good.

A far better choice is to use the Reverse HELOC equity to convert into guaranteed-for-life income stream. Also, many Planners don’t realize the Tenure feature of income stream is guaranteed for LIFE of both borrowers at full value, and can be changed, suspended, or converted back into a lump sum value at ANY time. Funds in the HELOC have a superior Cost Of Living Adjustment (COLA) feature-the HELOC balance is guaranteed to grow at the assumed annual mortgage interest rate (which is a much higher value than inflation). In the future? More equity may be deposited (just as a mortgage payment) into the Reverse HELOC, and be annuitized immediately on top of existing benefits. If you change your mind? Simply let your Lender know, and they will cheerfully reverse your unused position…at no cost to you or your equity. ***Be mindful-Deposited payments into a reverse mortgage cannot be allowed to exceed the value of the debt. If it equals or exceeds the debt? The debt is paid, the mortgage is cured, and the program is OVER. Pay it DOWN; don’t pay it OFF. Be careful. Trust me-Your kids can afford to pay off a $500.00 mortgage at your death.

 

4. With tax rates so low? It’s a GREAT time to do a traditional-to-Roth IRA conversion! (But, you can’t afford the taxes) 

Use your Reverse HECM HELOC!

2 strategies:

1. Use the HELOC to pay the tax balance due (vs. opening a 10 year Bank HELOC) and being saddled with payments and a 20 yr amortization. The HELOC line of credit GROWTH will restore most of the money you needed for free.

-or, better yet…

2. Use the mortgage interest in your reverse to create a 1098 and then withdraw and convert the equal amount of IRA money to the interest paid sum in the same tax year. Tax deduction is free, and the HELOC value is restored 100% immediately.

3. Or, use both techniques.

 

5.  “I want to pay off this damned mortgage…and I still have 23 years to go!”

Virtually NO ONE realizes the FHA HECM HELOC is a SUPERIOR mortgage pay off tool, and can save you thousands in interest (but, of greater importance for your retirement? It can save you YEARS of mortgage payments! Think about that. 23 years is a LONG time. IF you need to refi in a future need? it becomes another 30 years. But, when you refi with a reverse? Your reverse HELOC means saving thousands in future  refi fees and weeks in delays.

Because it’s a “Non-Recourse” mortgage,  no payments directly to the loan are required. Simply open an investment account (Work with a qualified planner to determine product suitability and your risk tolerances). 100% of your payment into a wool sock will prosper you better than what you’ll pay down in your current mortgage. Add a reasonable growth rate? And typically in 6-12 years you have choices-

1. Liquidate and pay off your reverse (keep the rest)

2. Pay DOWN (but not off) the loan. This builds a huge line of credit that you can use for income guarantees, emergencies, or any other good reasons.

3. Stop making investments and enjoy the increased income cash flow.

4. Reverse the investment balance from “deposit” status to “payout” status and increase your monthly income on top of your new additional (repurposed mortgage payment) cash flow.

5. Leave the investment for your Heirs and just live your life.

 

6. (BONUS reason) “I want to buy a boat.” (I hear you)…but, the fact is, you can’t. Your mortgage payment is in your way.

When you refi with the Reverse HELOC, it is a “non-recourse” mortgage. Since no payments are required, your debt to income ratio falls to virtually ZERO (depending on your credit card and other debt). Since your mortgage typically represents an average of 35-55% of your income, adding additional debt is a hard sell to a lender. Refi to a reverse HELOC and that percentage you had dedicated to making mortgage payments is now your new “capacity” to assume new debt. Go buy your boat. And, you can pull more than enough with your cash at close to put a really nice down payment on the craft or upgrade to a much nicer/newer model.

 

SO. What does your “bucket list” look like? Get your mortgage payment out of the way, and get on with living your life.

 

NONE of these benefits come from what you’re doing now. Only change can help you. Change what you’re doing now.