For Most Americans, Their House Is Their Largest Asset…
Yet the equity in one’s house is hardly ever discussed in financial planning models. It’s weird, actually. Especially when you think about the endless times we’re berated that we are not saving enough and we’ll never be able to retire. NEVER, I tell ya!
Never mind the fact that we actually ARE saving well over 10% of our income even if we never put a dime into a 401k or IRA. There’s this thing called Social Security. You may have heard of it. It’s a mandated retirement program where you put in 6.2% of your earned income and your employer puts in the same.
But forget that for now. Let’s go back to housing. The median home value in the US is around $220k. The median retirement account is WELL below that. Thus, basic common sense would lead one to assume the median American’s home is worth more than the media American’s retirement account.
Now, I get it, there are many ways you can skin this cat. You’d want to compare the median home value to the median homeowner’s retirement account.
Secondly, the median home value is NOT the median equity each homeowner has. I get that this too. And while I suppose you can focus on all that, you really don’t need to bother. The point is simply that homes represent a significant portion of an average American’s asset base.
Say you are the median household income in the US of $60k. You have $200k in home equity and $200k in your retirement accounts. Now you’re on that precipice called RETIREMENT….AHHHHHHH
You gather from Social Security that your monthly benefit will be $2k at Full Retirement Age. You watched my videos and are pretty comfortable you can pull 5% from your retirement accounts each year. That’s another $10k So, your income thus far is $34k a year which is only 56% of what your pre-retirement income was.
BUT…. your pre-retirement income of $60k included FICA, which is 7.65%. Included Fed and State income tax. We’ll just say 10% to keep it simple. It included 10% contribution to your retirement account too.
So, NET of taxes and retirement, you were only bringing home. around $43k. (60k minus 27.65%). In this scenario you are still short of your pre-retirement NET income by about $9k. Now, I’d argue you won’t spend the same amount in retirement as you did before for a number of reasons.
First, believe it or not, you DO spend income at work, dry cleaning, commuting, lunch etc. Many of those expenses will be gone.
Secondly, the evidence is OVERWHELMING that when people are living off assets as opposed to income from salary they reduce their spending. There is something psychological about spending down assets as opposed to spending income. People just don’t want to see their asset base decline and thus they are a bunch more stringent on their expenses.
Thirdly, again with the evidence, there is plenty to show that retirees spend DUH DUH DUH…LESS as they age, not more! Crazy talk I know. But for all the naysayers out there, just show me the evidence in the other direction. I would LOVE to see this.
However, we’re still a bit short of where we’d like to be from a retirement income perspective. So, what to do? What to do?
Consider these two things.
First, I did a podcast interview with Brodie Gay from Unison.com (find the episode here.). Unison actually buys a piece of the equity in your home and also takes a percentage of the future appreciation. There are no monthly bills to pay, no interest, nothing like that.
Unison will give you between 10% and 17.5% of your home value. The more they give the more future appreciation they take.
In the above example, Unison can invest up to $35k. (In this scenario, you’d give up around 75% of future appreciation, just be advised).
You can do whatever you want with that $35k. Let’s say you use it to supplement your income to the tune of $500 a month. That’s an extra $6k a year for the next almost 6 years.
For the next 6 years, at least, you’ll have $6k from Unison, plus $24k from Social Security and another $10k from your portfolio to total $40k a year, which is pretty doggone close to where you were while working.
“But Josh, in 6 years that extra $6k will be gone… what then, smarty pants?”
And this is why I recommend you consider a Reverse Mortgage the minute you turn 62. A reverse mortgage has a line of credit component that actually GROWS and you can actually take out a whole lot more equity from a reverse mortgage than what Unison will invest. (Here is my entire video playlist on mortgages.)
With a reverse mortgage at 62 years of age on a $200k home fully paid for, you’d be able to establish an $83k line of credit that you can tap into later if you need. And again that line of credit will GROW each year. Let’s say it grows at 5%, in 6 years it would be worth $117k for which you can draw on and, oh yeah, NEVER pay back as long as you are alive and live in the home.
By using these two strategies you are more than good to go from a cash flow perspective in retirement. Should you do these? Man, I don’t know. It’s contingent on YOUR specific situation. But why would you NOT consider putting some income into your pocket via your home equity?
“Josh, but Dave Ramsey says Reverse Mortgages are scams…” Yup, and Dave Ramsey is wrong.
“But Josh, I’m already getting value out of my home via imputed income(the fact I have to pay no rent).”
“Yup. And thus the home can serve TWO purposes, imputed income AND provide a cash flow!”
“But Josh, the costs…”
“Oh for the love of the Good Lord, nothing in this world is free. NOTHING! Do you really believe all these advisors out there who offer a “FREE” portfolio review are doing that in YOUR best interest? REALLY?”
If you have equity in your home and cash flow is tight to not consider using your home as a source of cash flow doesn’t make sense to me. This doesn’t mean you should sign up right now. It means do YOUR research and see if these products make sense…for you.