Retirees tap investments for income- why not their home?

During their working years, retirees have dutifully saved or invested tens of thousands, if not hundreds of thousands of dollars for retirement, all in the hopes of withdrawing those funds during their non-working years. Rarely do you ever hear objections from family and friends when mom or dad begin taking withdrawals from their retirement accounts. After all, it’s their money, and theirs to do with as they wish. But what about the hard-earned home equity millions of Americans have saved over decades? Uh, but wait! Not so fast say family, friends, and financial pundits. You shouldn’t do that! Call it a sacred cow or an ingrained fallacy of personal finance- one that needs to be put out to pasture.

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Let’s be blunt. Saving for retirement is prudent, but not without risks. Typical retirement accounts such as IRAs or 401(k)s allow tax-deferred growth during the accumulation phase as systematic contributions are drawn from one’s paycheck or cash accounts. However, all of the interest earnings or market gains made are taxed as they’re withdrawn. This arrangement is akin to a farmer paying taxes on his harvest instead of the seed. The investor enjoys a reduction in taxable income in exchange for the promise of a greater tax burden to be paid in the future. Then there’s the risk of market losses for those invested in any portfolio invested in stocks or equities.

However, when it comes to taxation home equity stands apart from qualified retirement accounts. Accumulated home equity is rarely taxed because loan proceeds are not treated as income. Of course, there’s the consideration of acquisition indebtedness, which is a topic that warrants its own segment.

Nevertheless, retirees seeking to increase cash flow are likely to avoid unnecessary taxes when utilizing a reverse mortgage. For example, a homeowner could reduce their tax liability by only taking required minimum distributions from a 401(k) instead of increasing taxable withdrawals. A reverse mortgage allows qualified homeowners to do just that without the burden of required mortgage loan payments each month. 

However, there are key considerations one should weigh before tapping into their home equity. Questions such as will I need to access part of my home’s value in the future to pay long-term care expenses if other funds are not available? Do I plan on moving in the next 5-10 years? Can I afford to keep the home if my spouse passes away reducing my income? But here’s another question that’s typically overlooked. If I choose not to secure part of my home’s value today will I have access to it tomorrow? Will I qualify for a home equity loan or any reverse mortgage? What if my home’s value drops considerably? 

One thing typical retirement accounts and home equity share in common is the potential for loss. Many IRAs and 401(k)s have seen significant swings in values thanks to the volatile stock market. Likewise, home equity is beginning to recede from historic pandemic highs. In fact, many housing economists now expect home prices to drop by 10-20% in the coming year. However, unlike investment portfolios that can reallocate shares out of risky asset classes home equity is stuck in the bricks and mortar of the home fully exposed to the real estate market’s boom and bust cycles. That home equity is captive to market fluctuations until it’s secured- the two most common ways are to sell the home or to take out a home equity loan. Reverse mortgage borrowers fortunate enough to secure a portion of their home’s equity at today’s values have in essence beat a bearish housing market without the burden of monthly loan payments. Even better, unlike a HELOC a federally-insured reverse mortgage’s available line of credit cannot be reduced merely because the home’s value has declined.

The sacred cow of home equity has robbed many older homeowners opportunity to improve their cash flow, tax liability, and most importantly quality of life. It’s high time for some cow-tipping. It’s time to tip over the sacred cow of homeownership that treats American’s largest asset as sacrosanct, never to be considered in the equation of retirement. Refusing to disrupt this sacred cow is not only irrational but harms the very individuals many claim to protect.

In closing, I want to remind our viewers who may be homeowners that I’m not a financial advisor. I am a reverse mortgage commentator, trainer, and passionate supporter of the proper use of reverse mortgages. So always seek the advice of a trusted professional when considering a reverse mortgage.

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