– By Conor Boyd, Managing Partner, Thoroughbred Advisors –
After years of working diligently and saving money for retirement, the day has finally arrived. For the first time in your adult life, you are about to experience something you likely haven’t experienced in decades: you are about to willingly walk away from a steady paycheck. If that makes you nervous, don’t worry, there is a whole new life waiting for you on the other side of retirement. Many of my clients have shared what was unexpected, what was wonderful, and what was a missed opportunity.
What was the missed opportunity? It has to do with a line of credit on their most valuable asset – their home. A home equity line of credit may sound counter-intuitive rolling into retirement. Many people mistakenly put a home equity line of credit in the same category as a home equity loan, but they are different. A home equity line of credit gives you “access” to a portion of your home’s equity but does not charge you any interest unless you use it. A home equity loan is just what it implies: it is an actual loan from the bank secured by your home.
Chances are you may have used one or both of these financial tools for things like home improvements, debt consolidation, or a child’s education. The problem is that many people miscategorize a home equity line of credit as accruing new “debt.” Yes, you have access to debt, it will show up on your credit report, but no interest will be charged unless you actually use the debt. You likely have been so focused on paying off debt, that you may be about to “throw the baby out with the bathwater.”
I have had clients walk into my office and proudly say, “I just closed my line of credit, I am debt-free and I’m ready to retire.” I often suggest that they do the opposite of this before they retire!
What many don’t appreciate is how difficult it can be to get personal loans, mortgages, and even car loans if you don’t have a steady stream of income. I have clients who have $2 million in assets and have to jump through hoops to get a simple car loan. While it’s not impossible to get these types of loans or lines of credit, it is significantly more challenging when you are no longer earning a regular paycheck. So much of the loan approval process is attached to your monthly income, which is easily proven by your pay stubs and tax returns. The thing with loans is that at the time you need them the most, you often cannot get them.
So why can home equity lines of credit be such a valuable thing for retirees (and everyone for that matter)? A properly secured home equity line of credit can almost act as a checking account. In fact, many home equity lines of credit today do have checking and debit privileges. Let’s imagine that you have a $300,000 home equity line of credit. You can write a check or swipe a card to gain access to your home’s equity. It’s important to note, however, that this type of strategy is definitely not for the person who lacks self-control. If you would walk out of the bank with your checkbook in hand and write a check for your plane ticket and cash to play with in Las Vegas, please disregard I ever shared this strategy. On the other hand, if you have been financially prudent throughout much of your life, this line of credit can be a great source of leverage.
A home equity line of credit could help you pay for a wedding, medical expenses, or college. If you need to sell your primary home to build your dream retirement home but can’t sell your primary home quick enough to free up the funds, a line of credit will help. It will also help if you just retired in September with your income showing up in the current tax year and want to wait until a new tax year before you start drawing from your qualified retirement plans to save on taxes.
A home equity line of credit allows you to access the equity when you need it, but also pay it back very quickly or over a period of time. With so many different types of home equity lines available, it’s prudent to speak with an expert to make sure you set up the right line for yourself.
As a general rule, for disciplined clients, I suggest the largest line available with the longest draw period. A draw period identifies how many years the line will remain open. I have worked with home equity lines that have a draw period of up to 30 years for a portion of your home’s equity, which could potentially take you through your retirement. Properly structured home equity lines can also charge a daily APR (Annual Percentage Rate). The potential value of this is that it is not amortized. An amortized fixed mortgage creates equal payments but takes interest payments over the entire period of a loan and loads them upfront. A daily APR only charges you interest each day for outstanding debt. These terms can be very useful for individuals who need money for shorter periods of time.
Retirement is a major life change and can bring with it many emotions. We want our clients to enjoy their next chapter with as little worry as possible. There is no one strategy that is right for every individual, but home equity lines of credit are regularly leveraged by many of my clients during their retirement years.
Conor Boyd is a Registered Representative and Investment Adviser Representative of Equity Services, Inc. Securities and Investment Advisory Services are offered solely by Equity Services, Inc., Member FINRA & SIPC. Thoroughbred Advisors, LLC is independent of Equity Services, Inc.
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