Integrating Home Equity into Retirement Planning

Advisors aren’t real estate agents, but they frequently engage in conversations with clients about residential real estate. Generally speaking, the bulk of those chats focus on saving for a home, strategies for getting the best mortgage rates and estate planning regard to whom the property will be bequeathed.

Many clients may not realize that a home can be an integral part of broader retirement planning and that’s the case in a variety of circumstances. Clients have myriad options for leveraging their primary assets as retirement enhancers and those choices are usually far more appealing than potentially risky reverse mortgages.

For starters, advisors can help realize that their homes are in fact vital parts of their aggregate financial pictures, particularly if the client is free of mortgage payments or willing to downsize in retirement. Often, clients exclude their houses from their overall portfolios, focusing solely on the liquid and alternative investments they hold.

That shouldn’t be the case because, after all, the home is likely one of the most, if not most valuable asset many clients hold.

Honing on Homes in Retirement

Let’s assume a client doesn’t want to leave their current residence because they’re clear of mortgage obligations – a perfectly good reason to stay put. However, that same client is concerned about the state of their investment portfolio following the equity and bond market calamity of 2022.

A home equity line of credit (HELOC) could be appropriate for that client because he or she won’t be forced to withdraw at depressed prices more than is necessary from investment and retirement accounts.

“To be sure, investors should consider a number of factors when including home equity in their retirement plan. HELOCs generally have variable interest rates, which means that rising interest rates can increase your regular payment,” notes Morgan Stanley. “And, as with any type of home loan, the borrower may encounter circumstances that require her to sell and move; for reasonably well-funded retirement plans, however, such cases were uncommon in our analysis.”

Moreover, Morgan Stanley’s research suggests that investors that leaned on HELOCs during rough market environments, such as the global financial crisis and the inflation-wracked early 1980s, were able to limit damage to retirement portfolios by not selling low.

Discussing the Buy vs. Rent Conundrum

Another area where advisors can add value is discussing the buy or rent riddle with retiree clients. Plenty of these clients want to cash out of their current homes, bank the profits and move into a smaller place, but many are confused about whether they should rent or buy.

Fortunately, this isn’t much of a debate as the notion of buying being financially superior to renting rings true for retirees, too.

“Part of the reason are the tax benefits and other public subsidies for homebuyers. But it’s also because home prices are only weakly correlated with the capital markets. That means that a home can act as a diversifying source of wealth and serve as a financial backstop, if your other investments falter,” adds Morgan Stanley.

The point: Advisors can not only illuminate clients to the importance of their homes in retirement planning, but help them strategize their primary residences for better retirement outcomes.

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