Ep. #148 - The House as a Retirement Tool: Smart Ways to Tap Home Equity

[00:00:00] Adam Werner: Hi everyone, and welcome to AB Conversations, where we will help you CFP your way out of it. A podcast where you get into the minds of a couple certified financial planners on how we think and feel about everyday financial planning questions, and what should really matter most to you. A healthier financial life starts now. 

Hey Ben. How you doing? 

[00:00:30] Ben Haas: Good afternoon. Doing great. How about you? 

[00:00:34] Adam Werner: Fantastic. 

[00:00:35] Ben Haas: Lovely. 

[00:00:38] Adam Werner: Can we stall some more before we get into the riveting topic of using home equity in retirement? 

[00:00:45] Ben Haas: Yeah, this might surprise some people, right? This is not something that I'd say we recommend with great frequency, but let's, you know, kind of lay the groundwork here. For most retirees, your home is probably a big, large asset on your balance sheet. 

We'd often don't think of it as a tool for income, but that doesn't mean it can't be. So I guess the question that we should really dive into today, should you use it? If so, how? 

[00:01:11] Adam Werner: Yeah, it is interesting because like you said, and I'll double down on it, it's not something that we frequently recommend, but as we're getting deeper and deeper into, you know, the retiree landscape and thinking outside the box. 

There have been certain scenarios where it could make a lot of sense. So to your point when we say, use this home equity, what does that really mean? And it doesn't necessarily mean, you know, the typical downsizing that I think a lot of people consider going into retirement, which we'll talk about that a little bit more in depth. But just something as simple as opening up a home equity line of credit. Just to have access to a pool of your equity or a reverse mortgage, I think is typically one that a lot of people know exists, but it's often thought about, at least may, maybe I'm biased, right? But when I think about the world of finances, you know, annuities, rightfully so in many camps, get a bad rap. And I think reverse mortgages kind of fall into that same camp. 

[00:02:17] Ben Haas: Yeah. Yeah. But I guess that's what we should review today. If there are strategic ways, and maybe that's the way we should go about this, let's maybe look at some of the real world scenarios where home equity really can probably be a game changer to your whole retirement plan. 

So let's just jump into it. Scenarios where this might work out. I would say the first one that I kind of think about. We've done a podcast on this very recently, right? It's what is the proper timing for claiming social security, right? 

So let's now develop some sort of example here where home equity might come into play here. You've got somebody that maybe retires on the earlier side, at least as far as social security is concerned, right? You can access these benefits at age 62. Let's say your benefit that's greatly reduced from your full retirement age of 67. 

So, let's say it's $1,800 a month. That same person, if they waited till age 70, if that benefit was now $3,200 a month, that's an 80% increase, right? The lifetime benefits coming from Social Security are huge. Now, how does this tie into home equity? Well, clearly, if we're not taking Social Security at 62, we gotta bridge that gap. Where's income come from? 

[00:03:34] Adam Werner: Yeah, and oftentimes, and I think we probably talked about this in that Social Security podcast. Oftentimes it's okay, I'm gonna rely on my investments and my savings, which is fine, but oh, maybe I'll just pause it there, 'cause there is a subsequent one, which we'll kind of bolster in my comment. Yeah. But yeah, essentially using the, that home equity as just a bridge, right? We just need to get to whatever that next age is or where it may make sense. It just provides that additional level of flexibility and like you said, knowing that by delaying Social Security, and I know we talked about this in that specific podcast, the math is always going to say to delay Social Security as long as possible, 'cause your benefit's gonna be higher. And then each subsequent cost of living adjustment is going to be compounding, you know, income on top of that. 

But that all assumes you're going to live well into your eighties, you know, and beyond for that math to kind of work out. But yeah, that idea of using your home equity to buy yourself time to delay social security can, could lead to many thousands, hundreds of thousands of dollars of increased social security over a long lifetime. 

That could be huge. 

[00:04:48] Ben Haas: Yeah, you're effectively buying yourself some time, and if you're gonna age in place in your home, then using your equity to buy that time if you do have a long and healthy life. Yeah, it could really make sense. I mean, and it shouldn't be lost on us. Social Security is also inflation adjusted over time. 

So this isn't just more dollars like earlier in retirement. It could be really protecting you and your longevity from rising costs in the future. 

[00:05:14] Adam Werner: And so this'll dovetail into the next scenario. So that idea of just kind of being that bridge, between certain timeframes. 

Right. And if we're thinking about social security delaying it, oftentimes people will rely on their investments. But what happens in that scenario if you're relying on your investments to delay social security and it's just not a good time in the markets? 

[00:05:35] Ben Haas: Oh, right. 

[00:05:35] Adam Werner: And that, and now you're delaying social security, which more often than not is good. 

But now you're in a scenario where you're taking from your savings, you're taking from your investments, while the markets are also in, in a rough patch that can have a negative compounding effect. So here again, the bridge of using home equity to buy yourself time to maybe not rely on the investments for a period of time in down markets, right? 

Just think of it's the sequence of returns risk, which I know we did talk about recently too. That idea that, you know, somebody starts with a million dollars, they retire. And all of a sudden the market drops, you know, 20% over a couple year period. Now this is assuming we didn't do the work on the front end or the client or whoever, you know, didn't have their three bucket strategy kind of set up that would, in theory, be able to buy yourself some time to not have to liquidate, you know, investments when things are down. 

But the idea of just, again, relying on the home equity line as a bridge, as a layer of flexibility to allow your investment to recover because we know historically that has always happened. It's just been a matter of how long has it taken. And hopefully that avoid the whole, the golden goose scenario, right? 

Where we want to be living off the eggs and not eating the geese. That once we do that, we're not gonna get those eggs again in the future. So that's the idea there of using that home equity line for when markets are not as favorable. 

[00:07:05] Ben Haas: Yeah, all we're looking to do is again, not have the timing of the market derail the future of that portfolio. 

So it could certainly make sense there. I'm gonna jump to another one. And it's kind of in that same camp of just maybe bad timing or surprises. Right? Life does not always give us great heads up on what's gonna happen for us, and healthcare surprises are often one of those things that are not only just this big stress point, but it can really be disruptive to your savings. 

Right? So can home equity then be kind of this flexible backstop? So let's put math to this again, you know, spouse has some sort of healthcare event and now maybe there's a long-term care need and there's a $6,000, $7,000 a month bill that we weren't anticipating. And that happens for two years. 

Okay. You know, extrapolate that out. We're talking 120, 130, $140,000. Most people build their wealth in a retirement account. Right? And if now they need to tap into that retirement account, we're just compounding problems here. Right? Not only maybe the timing of taking money out as you just illustrated, but that could also be a large tax bill. 

Right? And we don't, want that, that compounds the problem. 

[00:08:20] Adam Werner: Exactly that's exactly the words I was gonna use. The, it's that potential compounding negative effect. You know, when you talk about compounding growth, that's a wonderful thing. Everybody knows, you know, the time value of money, but this can work in reverse as well. 

And some of that just comes down to the timing. And I know you said that, right? It, this, the idea of using home equity doesn't necessarily need to be a long-term solution. It often, in these scenarios that we're presenting, it really is just. It's a temporary, 

[00:08:50] Ben Haas: yeah, 

[00:08:51] Adam Werner: a temporary bridge. It's that temporary solution to buy yourself the time to spread out some of your impact, right? 

And just lessen the financial ramifications over just a much longer period of time. So yeah, that idea of accessing the home equity versus an IRA withdrawal, number one, yeah, you're gonna avoid the taxes because you're not gonna pay. Income taxes on the equity in your home. And ultimately it just, it comes down to the flexibility that just is provided by going through that process. 

So maybe we'll go to one more and just, you know, beyond simple emergencies and sticking on that tax side of things. The idea that home equity can manage taxes over time. The one thing that this will not affect everybody, but there is essentially a cliff when it comes to Medicare premiums based on your income. 

So depending on somebody's situation, there, there is a world where, you know, taking additional withdrawals from investment may push them over that income limit and now it's that domino effect, right? Those negative compounding effects of now not only do I need to take more from my investments, which may or may not be okay depending on the situation, but now I'm having the effect of, now I'm gonna pay more for my Medicare premiums moving forward because I've taken a bigger withdrawal this year for whatever that reason may be. Right? All these different scenarios we're painting. If it's something as simple as well, I needed, there were higher healthcare expenses or there was a long-term care event. That's the scenario that just feels awful where you're dealing with that. 

But now you're getting bumped into potentially a higher tax bracket and you know, your Medicare premiums will be increasing the following years as well. So there's, there's ways to use this, home equity to manage your taxes to some degree from year to year as well. 

[00:10:42] Ben Haas: Yeah, maybe this is where we can pivot a little bit into talking, you know, a little bit more on the trade offs, right? 

Because the tapping into home equity does not mean that it doesn't come with some sort of trade off. Whether that's cost, whether that's repayment, right? So if home equity can help, I guess the next question's gonna be like which of these tools should you use and when? Right? And we've, we've referenced both of them, so maybe I'll kickstart it. 

People are probably more familiar with the home equity line of credit, right? That line of credit really means, okay, I can tap into it when I want to. And I don't necessarily have to take it all. I think that fits some of those shorter term needs that we kind of reference in certain scenarios. 

Right? The costs of that aren't as big upfront, but the issue there is you are gonna repay that back. Right? That is a line of credit. It kind of becomes a bill. 

And we've also seen, I think maybe in more dire circumstances, right? Banks can freeze those. They did back in 2008. Yeah. But I think just generally speaking, that is a pretty quick way for short term fix. 

Whether it was something like you mentioned a healthcare bill markets I just wanna avoid some taxes this year. That it's a tool. It's a resource. 

[00:11:48] Adam Werner: Yeah. Well, and sticking on that idea of, you know, banks being able to kind of freeze the home equity line of credit kind of space. We've heard from clients these last couple years where, you know, very specific banks are just getting out of the lending, the home lending space sometimes. 

You could, well, I'm thinking of one scenario in particular. They've had a home equity line of credit open for 20 plus years, used it sparingly, are not, do not carry a balance now, and all of a sudden the bank comes to 'em and says, we're gonna close this for you. We don't want this liability out there anymore. 

And now your options are kind of taken away from you. There certainly is the option to now go to another bank, but that is just more of a process, more time, more effort that may be needed. So the other option there is still within that realm of a line of credit, but it's under the umbrella of a reverse mortgage. 

So to your point, it is, it's similar in that it, you can draw based on what you need and when you need it, but it can't be frozen. There's no, there doesn't have to be any repayment process, right? That is one of the bigger, I guess benefits to doing the reverse mortgage side is there's not the need to make ongoing payments, you know, moving forward, and that borrowing capacity, that line of credit in theory, should grow over time because it's tied to the value of the home. 

And we know that over time the home values will increase. So there's some benefits there, but this is all assuming to a certain degree that someone's going to age in place in their home when thinking about that reverse mortgage, 'cause that then becomes another risk. 

[00:13:27] Ben Haas: Yeah. And let's just stay there, 'cause I think the last part of this is really to talk about these as trade-offs, right? Again, if we've explained the tools, there are costs associated, and this isn't meant to be a podcast on the nitty gritty details of home lending. But in that idea of aging in place, I think we deal with a lot of people, you know, when we talk about legacy planning, that they kind of want this home, or their home to be passed to their kids. But more often than not, when we're a part of the process of settling an estate, especially if there's multiple children, the decision is, well, we're gonna, we're gonna sell it and we're gonna divide the proceeds. So I think somebody's legacy planning and how they view their property is a big variable in this, but if you are, to your point, aging in place and it's not really the family plan that a child or one of children are gonna live in this home, then it does bolster the kind of option, I would say, to use the equity out of that home. If it's going to serve your own retirement plan better. 

[00:14:25] Adam Werner: Right. And I think that just speaks to just changing values or just preferences and just demographics, right, of previous generations compared to now. Families are more spread out than they were in the past. So the idea of, you know, the child wanting to inherit and live, live in the parents' house, that feels like that's becoming less and less common. So to your point, that it really does come down to the individual situation and what do the parents prefer, but that could still very much differ from what the children may want and prefer at some point. And we wouldn't want that to get in the way of, you know, the, we have had these conversations, maybe not this specifically, but in dealing with older individuals in this area. 

I'll say it, it's the Pennsylvania Dutch kind of mentality that is, yeah, I have this asset, I want to pass something to my kids, and the house is a good way to do that because I'm not going to spend from it. There's going to be value there no matter what. But if that precludes that person from doing more things in their retirement or just having additional flexibility for what, in the end, the kids may just liquidate anyway, that would feel not to be a great use of their savings and of an asset. 

[00:15:42] Ben Haas: Yeah. I think how people feel about it is clearly important here. Right? We're gonna have to balance the numbers with the values, right. Even if the math makes sense, we're not. Advocating here for everybody to do this. I just think for some retirees, home equity is a lever that let's hope they never have to pull. 

Again, not even thinking worst case scenario, just you have other savings, you've got sustainable income that's gonna cover all your bases, but again, life's not a straight line. Curve balls happen. I think there are certain situations and hopefully we've illustrated that where we as planners should at least have the conversation with you. 

You know, this may be a different way, I think you said it at the onset here. We're thinking outside the box a little bit. Of all the tools that you have, all the levers that you can pull. Let's just recognize that home equity is one of them. 

[00:16:31] Adam Werner: Yeah, and I think maybe, we'll, I'll put a bow on it with this, like, like you just said these are tools. 

These are not, you know, magic wands or the silver bullet that's going to solve all of our problems. There are downsides, there are trade-offs when it comes to essentially using your equity to, to be a bridge. There's gonna be costs, there's gonna be fees, there's potentially, you know, insurance premiums that are a part of that. 

It can be slightly more expensive than, you know, some other options. But they are just that these are tools, these are potential strategies, and that, that's where it's kind of our job to help assess where does this make sense? What are those trade-offs? And based on the situation, just what may be an okay path forward and just try to figure out, put, putting a lot of these pieces together to just hopefully put somebody in a much better spot. 

And feeling like you're just painted into a corner and now I only have this one option and I just gotta take it from my retirement account. 

[00:17:27] Ben Haas: Yeah, this definitely falls into that camp of everybody has unique circumstances, so you know, what would work for one is not gonna work for another and use of home equity is, you know, definitely gonna be in that camp. 

But hopefully for this is helpful. Again, just one more thing for us to be considering when we're working with retirees. 

[00:17:43] Adam Werner: Yeah. Yep. 

[00:17:45] Ben Haas: All right. As always, appreciate your leadership here. Your wise, wise words, 

[00:17:52] Adam Werner: likewise. 

[00:17:53] Ben Haas: Till next time. 

[00:17:55] Adam Werner: Bye. 

[00:18:02] Ben Haas: Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only, and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you, consult with your attorney, your accountant, and financial advisor, or tax advisor prior to making any decisions or investing. Thanks for listening. 

Investment Advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Haas Financial Investment Advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Haas Financial Group are separate entities. This is not intended to be used as tax or legal advice. Please consult a tax or legal professional for specific information and advice.  are separate entities. This is not intended to be used as tax or legal advice. Please consult a tax or legal professional for specific information and advice. 

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