Sounds like an ad for a high commission annuity, doesn’t it?

But this is a different idea. It works really well for clients who are “IRA or retirement plan heavy.” That is, you have more money in your IRA or retirement plan than you have outside your IRA or retirement plan. I made recommendations regarding this idea to several clients who took my advice and just recently received some wonderful feedback on how well that advice worked out. Are you curious yet?

Would you ever consider getting a Home Equity Line of Credit (HELOC) or a reverse mortgage at this stage in your life?

I can hear the resounding “NO” from my desk in Tucson…

But take a moment to hear me out. Even if you never seriously considered it, I recommend you read on. Just knowing there is the possibility of getting funds from your house in the future could have a lot of value.

A number of years ago a client with a substantial IRA was helping one of his children who was struggling financially. When I met him, he was withdrawing enough from his IRA to both pay for his and his wife’s expenses and his child’s. His tax bill was enormous, and he was rapidly depleting his portfolio. He owned his house and had no mortgage.

I suggested that he take a Home Equity Line of Credit (HELOC) on his house and use that money to help his child when his child needed money. He could take nontaxable distributions on the HELOC whenever he wanted.

Even if he never pays off the line of credit, so what? If he doesn’t move and dies in the house, the house will eventually be sold. The HELOC balance will be paid back to the bank, and the remaining proceeds will go to his estate.

The key was he got non-taxable “income” for years when he and his family wanted the money.

In another situation, clients used a reverse mortgage to pay additional expenses and make gifts to their children. They wanted to help their adult children when they could really use the support.

But you may be in a position where neither you nor your children need extra income. So how could this concept be beneficial to you?

Consider that you could use the non-taxable proceeds from the HELOC to pay the taxes on a Roth IRA conversion. An article I wrote for Forbes.com titled “Let Your House Pay for your 2020 Roth IRA Conversion” received several hundred thousand hits. If you would like a copy of that article, please call 412-521-2732 and ask for a copy.

Here’s another idea. Maybe you just want to feel comfortable knowing you can afford to spend more or that you are not overspending.

I was cited in Jonathan Clements’ column published in The Wall Street Journal that essentially said you could increase your safe withdrawal rate by 60% of the equity of your home multiplied by the percentage you are using for a safe withdrawal rate.

Example:  Your portfolio is $2 million, you are using a 4% (30-year life expectancy) safe withdrawal rate, and you arrive at $80,000 per year plus Social Security. Let’s assume your house is paid up and worth $1 million. Using our formula, you would multiply that $1,000,000 times 60% to arrive at $600,000 and 4% of $600,000 is $24,000. Using that formula, you could safely increase your spending by $24,000…or know that you could if you wanted to.

There is an argument with today’s higher interest rates and bankers’ greater reluctance to make loans, you should consider 50% instead of 60% but the idea is the same.

In general, I only recommend these techniques where there is virtually no chance of losing the house because you can’t make the payments. The waters for reverse mortgages might be even murkier because they are not easily undone. It should be noted that a mortgage broker may make a commission on one of these transactions. I, however, do not, and I would not take a referral fee from a mortgage broker either.

Let me be totally clear: none of these decisions should be made without serious analysis.

We always recommend consulting with a trusted advisor who has the ability to fully analyze your financial position and “run the numbers” to help you with your decisions.