Many people strive to pay off all their debts before retirement. While this is a great goal, there are some types of borrowing that may be appropriate even after retirement. A home equity line of credit – also known as HELOC – is one type of debt you might consider using even after retirement.
Car Purchases
When planning for retirement, many people prepare a baseline budget and forget about expenses like buying cars or other things that may happen once every five or ten years. If most of your money is tied up in retirement accounts like IRAs and 401(k)s, every time you make a large withdrawal, that amount will be included as taxable income on your tax return for that financial year.
If you make a large withdrawal in one year to fund a big expense, it might push you into a higher tax bracket. For example, if your regular withdrawals are taxed at 15%, you might end up being taxed at 25% if you withdraw a larger amount. In such cases, it may be wise to use a HELOC to finance a large purchase, allowing you to pay it off gradually without incurring a large tax bill in one year.
Home Repairs
Just like car purchases, many people forget to budget for home repairs when preparing their retirement budget. This is one of the items we refer to as a “retirement budget killer.” If you spend 20 to 30 years in retirement, it’s likely that your home will need some work during that time.
A HELOC can provide an alternative to selling investments or making large withdrawals from retirement accounts. By borrowing funds, you can pay off the amount gradually instead of depleting your portfolio.
Alternative Source of Cash During Market Downturns
Managing funds for retirement is very different from managing funds during the accumulation phase. Once you start withdrawing money regularly, a market downturn can have a more severe impact on you. Technically, this is referred to as “sequence of returns risk.”
If you can avoid or reduce withdrawals during down years, you can increase the longevity of your portfolio and your expected lifetime income. A home equity line of credit can be utilized for this purpose – as an alternative source of cash during downturn years, then you gradually pay it back as your portfolio recovers.
Helping Children
Do you have an adult child moving out or going through a period of unemployment, or do they need assistance in some way? Or maybe they need money to start a business or buy a home. Many parents lend money to their adult children, and the children pay off the debt when they are able to.
Regardless of the reason, if you would incur tax consequences from selling investments, you may prefer to borrow instead. If you have established a HELOC, it could be available for use in these situations.
Financing the Purchase of a New Home
Many people retire, and within five to ten years, they decide to move. Whether the reason is to be closer to grandchildren or to seek a new climate or for other reasons, it sometimes happens – even if it’s not planned. In most of these cases, a new home is purchased before the old home is sold.
By borrowing against your mortgage, you can often finance the down payment on the new home. Again, this may be a better solution than liquidating investments, as selling investments would involve trading costs and tax consequences.
Conclusion
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Applying for a home equity line of credit in retirement can be very suitable. Of course, you must have equity in your home. As long as you have equity, it doesn’t matter whether your home is paid off completely or if you have the first mortgage.
The main thing to remember is that you need to build the new loan payments into your retirement budget. Unless you plan to move soon, you will want to plan to pay back the borrowed amount so that you can use the line of credit again in the future if you need it.
Source: https://www.thebalancemoney.com/home-equity-credit-retirement-2388756
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