"Your home is not your retirement."
Last week, I addressed this common piece of financial advice, and challenged the first of two reasons why this advice is given: that you will always need a place to live so you can't count on having enough money in your home to pay for your retirement. As I demonstrated, for those home owners living in higher-priced housing markets, likely there will be more than enough equity in their house to pay rent or downsize in retirement, leaving some excess funds that they should count on in their retirement plan.
The second bit of rationale behind this common phrase is that having all of your wealth tied up in your house will not leave you with any cash to pay for your needs like food, clothing and fun. Absolutely true. Cash is king when it comes to providing for your basic needs. ("You can't eat your house.")
But here's the thing: if you want to retire or semi-retire but not sell your house just yet, you can use a home equity line of credit (HELOC) to supplement your income without jeopardizing your future. Why delay your retirement or live on less if your house, when you do sell it, will net you buckets of money, more money than you'll need? Why deprive yourself in your 60's only to leave a large estate behind? (Sorry kids.)
Using a HELOC to improve your life
HELOCs are incredibly flexible, easy to access, and require interest-only payments. You can take what you want when you want, and repay the principle or not. If you decide not to repay the principle, you will simply pay it off when you sell your home.
There are few guidelines to this strategy: borrow and spend responsibly and make it a time-limited strategy to keep the interest costs reasonable.
In my blog post I detail an example of someone who retires at 65 with a mortgage-free house worth $1.2-million dollars. They supplement their retirement income with modest withdrawals from the HELOC. The punchline is that when they sell the house at age 76, they still pocket over a million dollars after paying off the line of credit. And in the meantime, they have enjoyed their life and left more of their RRSP savings in tact.
Financial planning is highly personal
Financial articles and blogs are helpful but are limited in their ability to help you with your own financial plan because it is so personal. Every situation is unique and requires individual analysis. It's particularly true if you are considering taking on debt in retirement using your HELOC so be sure you fully understand your own situation and how borrowing will impact your finances.
Take care of yourself (and your money),
Anita Bruinsma, CFA
Clarity Personal Finance
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