Many people try to repay all their debts before retirement. This is a good goal, but some types of borrowing can make sense even after retirement. A home equity line of credit often called Hilloc (pronounced “it-locks”) is a type of debt that you might consider using even if you are retired. Here are five ways to use a home equity loan to manage your cash and account withdrawals.
Many people prepare a basic budget when they plan for retirement and forget about expenses such as buying a car, because such things can only happen every five or ten years. If most of your money is held in retirement accounts such as IRAs and 401 (k), then every time you make a withdrawal, this amount will be included as taxable income on your tax return for that calendar year. .
If you make a large withdrawal in one year to finance a significant expense, you may be placed in the next higher tax bracket. For example, if your normal withdrawals were taxed at 15%, it could be that if you withdraw more, they will be 25%. In such situations, a net worth line of credit can be used to finance a large purchase. You can repay it gradually without taking a large taxable withdrawal in one year.
Like car purchases, many people forget the cost of home repairs when setting their retirement budget. This is one of the things we call the killer of the retirement budget. If you spend 20 to 30 years in retirement, of course, your home will need work. A home equity line of credit can be an alternative to selling investments or making large withdrawals from retirement accounts. By borrowing funds, you can repay them gradually instead of disrupting your portfolio.
Alternative source of liquidity in the market down
Money management for retirement is quite different from money management during years of accumulation. Once you take regular withdrawals, a falling market can have a bigger impact on you. In technical terms, we speak of “sequence risk”. If you can avoid withdrawals or reduce withdrawals during off-peak years, you can increase the expected life of your portfolio and your potential income for life. A mortgage line of credit can be used for this purpose. Use it as an alternative source of cash in the years to come; then you pay it off gradually as your wallet recovers.
An adult child who moves, goes through a period of unemployment or does he need assistance? Or maybe they need money to start a business or buy a house and they will pay you back. Many parents lend money to their adult children. Whatever the reason, if you suffer tax consequences by selling investments, you may want to consider borrowing instead. If you have established a Hilloc, then, it may be there to expect you to use in these circumstances.
To finance a purchase of a new house
Many people retire and decide to move in the next five to ten years. They did not plan that, it happened. Sometimes they want to be closer to grandchildren, other times it’s a different climate, new activities or a community of “over 55” that they want. In most cases, a new house is bought before the sale of the old. By borrowing on the equity in your home, you can often finance the down payment on the new home. Again, this may be a better alternative than liquidation of investments, as the sale of investments will result in transaction costs and tax consequences.
Overall, applying for a line of credit at retirement can make a lot of sense. Your home must have equity for it to work, but as long as you do, no matter if your home is paid or you still have the first mortgage. The bottom line is that you need to integrate your new loan payments into your retirement budget. Unless you move in as soon as possible, you will want to repay what you have borrowed so you can use the line of credit later if you needed it.