Home equity may be the biggest asset you own. Many people prefer not to include their home as part of their cash flow plan in retirement, but we’re living longer and retirement is getting more expensive! In this episode of YMYW TV, Joe Anderson, CFP® and Big Al Clopine, CPA explore ways to use your home to generate retirement income.
How to Create Retirement Income From Your Home
- Downsize
- Traditional Mortgage Options
- Reverse Mortgage
- Creative Alternatives
Important Points:
- 00:00 – Intro
- 00:46 – Wealth By Asset Type
- 01:18 – Wealth by Housing Tenure
- 02:15 – Using Your Home to Create Retirement Income:
- 02:57 – Homeownership by Age
- 03:39 – 4 Reasons to Downsize
- 04:11 – 3 Financial Benefits of Downsizing
- 05:18 – Tax Benefits When You Sell Your Home: Section 121 Exclusion
- 06:31 – Retirement Readiness Guide – free download
- 06:49 – EASIretirement.com free retirement calculator
- 07:27 – True/false: Refinancing and taking a home equity loan are the same thing
- 08:15 – Traditional Mortgage Options: home equity loan, a home equity line of credit (HELOC), cash-out refinance
- 10:24 – Traditional Mortgage Tax Consequences
- 10:52 – Reverse Mortgage Basics
- 11:29 – Reverse Mortgage Pros & Cons
- 12:45 – Reverse Mortgage Basic Calculations
- 13:04 – How Does a Reverse Mortgage Work?
- 14:22 – EASIretirement.com free retirement calculator
- 14:47 – Retirement Readiness Guide – free download
- 15:03 – True/false: Retirees 62 years old or older can take a reverse mortgage without going through counseling
- 15:40 – Creative Alternatives to Generate Retirement Income From Your Home
- 17:45 – Can I deduct my mortgage from my taxes if I have a home-based business?
- 18:42 – Do I need any special insurance if I rent my home on AirBnB or VRBO?
- 19:23 – Pure Takeaway
Transcript:
Joe: Hey, when you think about your assets, what is the largest one single asset that you own? Most people are saying their home, but do you have a strategy to utilize that asset in retirement? Joe Anderson here, CERTIFIED FINANCIAL PLANNER™, President of Pure Financial Advisors, and I’m with the CPA extraordinaire, Big Al Clopine. Hello, Big Al.
Al: How you doing, Joe?
Joe: Doing real good. We’re gonna talk about home equity.
Al: I like it. One of my favorite topics.
Joe: Yeah. And we are not experts. We’re not mortgage brokers, we are financial planners. But when you look at an overall financial strategy, some people might need to use that home equity. And there’s multiple strategies that you can use. Let’s take a look at wealth by assets. We have retirement accounts of about 34%. Equity in your home is around 30%. So retirement accounts and equity are almost the same. Of course you have stocks, bonds, mutual funds, cash, and things like that that round out the rest. But when you’re looking at a retirement strategy, most people aren’t even thinking about equity in their home or it’s their last resort. Let’s figure out a strategy on how to combine all of these to have a secure retirement. That’s today’s financial focus. Alright, let’s take a look at wealth here in the US. Median US households in 2021, owner, including the home equity is roughly $400,000. You take out that home equity, what they have liquid is roughly about $158,000. $240,000 on average is the could be just sitting inside the house. Some people may need to start utilizing this and there’s some strategies on how to do it the most effectively. Let’s bring in Big Al to show us the way.
Downsize
Al: All right. Creating retirement income, including your home. Many times you hear, don’t use your home in your retirement calculations, which is something we say also. However, in certain cases, a lot of people have a lot of equity in their home. So let’s talk about how to take advantage of that. Number one, kind of obvious, but you could sell, you could downsize. If you downsize, you’re buying something cheaper. You might end up with a lower mortgage or no mortgage, or you might end up with cash in your pocket. Number two, should you think about it? Refinancing traditional mortgage option, or maybe how about if you’re over 62, a reverse mortgage. Pros and cons on that. We’ll dive into that. And then how about some creative alternatives? So Joe, I can hardly wait to dive into this. I love real estate.
Joe: So you look though, I mean, someone’s primary residence is one of their largest assets. And if they have lived in that house for a very long time, they have built up equity within the overall home. So there’s different options that you can utilize if you want to tap into that equity. So let’s start here. All right. A lot of you own homes. 45 to 54, 71% of people in that population own a home. 55 to 64, 75%, 65 plus almost 80% of these individuals have this asset of a primary residence. So, is this the last resort? Not necessarily. If you have the appropriate strategy and understand the pros and cons of each of your financial moves, I think that’s with everything. If you buy a stock, a bond, right? There’s pros and cons there. If you tap into the equity, there’s pros and cons here. If you understand the risk that you’re taking before you get into the strategy and draw it out, I think you can come up with a better solution.
Al: So let’s talk about downsizing. It’s not just dollars and cents. Why would you want to downsize in the first place? Well, first of all, kids are grown. Maybe you don’t need as big a home, so that would be number one. Maybe you don’t want the stairs anymore. Maybe you got a two story or 3 story. You want a single-story home. As you get older, a little bit tougher to get up and down the stairs. Maybe you want to move closer to family members. Or another one is you don’t necessarily want to keep, try keep care of a yard, right? And all the stuff that goes along with it. Maybe you want a condo so you don’t have to worry about any of that. A lot of reasons to consider downsizing. But the financial reasons can be pretty helpful. What if you got a mortgage and you downsize to a cheaper home and you can eliminate that mortgage? You don’t have a mortgage anymore. How helpful would that be in terms of your retirement income planning? Or maybe you reduce expenses, right? Maybe you’ve got high property taxes or high maintenance costs, fees or whatever. Maybe you get into a smaller home and those- those decrease and potentially if you downsize, maybe you end up with some additional cash that you can invest for retirement savings. So all around, it could help you with your retirement income strategy.
Joe: Looking at expenses of a home, 1% of the market values annual expenses for just upkeep maintenance of a home. Have you ever heard of that before?
Al: Could be something like that. So let’s say you have $1,000,000 home, that’s a pretty big check that you’re writing just for the maintenance and everything else that goes on just by the upkeep of that house.
Al: Right. And probably just keeping the home up. And what about new couch, new drapes, new this, new that?
Joe: Exciting.
Al: It adds up.
Joe: All right. Now you sell the home, what is that going to do in regards to taxes? Well, there’s this 121 tax exclusion for your primary residence. If you’re single, you can exclude $250,000 off of that growth of the house, $500,000 if you’re married. How do you qualify? You have to live in the primary residence two out of the last 5 years.
Al: If you live in it 5 years ago for a year and then you rented it for 3 and you move back in, you can reestablish it as your residence as long as you have two out of the last 5 years. And of course you have to own it two out of 5 years as well.
Joe: How about if I am single and then I get married. How long do I have to be married to take advantage of the full $500,000?
Al: It’s more on ownership and occupancy. So let’s say your future spouse is living with you beforehand. So that, that counts as occupancy, but they’d also have to own it two out of 5 years. So it’s not so much if you’re married, it’s two out of the 5 years of both you qualify. Maybe you’ve only been married at 6 months. You could still get the full $500,000.
Joe: If you need more help with this, you know where to go. YourMoneyYourWealth.com. Click on that special offer. It’s our Retirement Readiness Guide. We’re looking at all sorts of different strategies to get you ready for retirement. Go to YourMoneyYourWealth.com. Click on the special offer. It’s our free gift to you. We got to take a short break. We got a lot more to go. We’re talking strategies in regards to your overall home.
Andi: Do you know, right now, how likely you are to run out of money in retirement? There’s an easy way to find out. It’s also free. Go to EasiRetirement.com.
Traditional Mortgage Options
Joe: Hey, welcome back. Show’s called Your Money, Your Wealth®. That’s Big Al. I’m Joe Anderson. We’re talking strategies in regards to your overall home. Go to YourMoneyYourWealth.com. Click on that Retirement Readiness Guide. You can download it right there for free on your computer. YourMoneyYourWealth.com. Click on that special offer. Hey, let’s see how you did on the true/false question.
Al: Refinancing and taking a home equity loan are the same thing. True or false. Well, that’s clearly false, right? Refinancing. You’ve got a home mortgage already and you refinance it. You get a new mortgage to pay off the old mortgage. Why do you do that? Maybe get a lower interest rate. Or maybe you want to take some cash out. That would be reasons to refinance. A home equity loan is a loan that sits on top of your current loan. You get a home equity loan, you still have that original loan. Now you got the home equity loan, generally to get additional cash out. That would be the reason why you’d want to do that. In general, home equity loans are variable interest rates in terms of regular loans and refinance loans. They can be fixed or variable.
Joe: Yeah, now we’re getting into some dicey territory, Big Al, because I think a lot of people as they transition into retirement want to be debt free. I do not want a mortgage over my head. I do not want any payments. If things go bad, I know that I have my house. And we can sell it and downsize as a last resort. However, for some of you, if you’re thinking about it, just understand the terms to make sure that you get the risks and the return that you’re looking at. So home equity line is what Al says is just fixed. Home equity line of credit. So that could be a revolving credit that could be there as a safety valve. So you wanna make sure that you open this while you’re still working before you retire. Right, because if I’m retired and I don’t have any income, then it- I might not qualify for a home equity line. And back in the credit crisis, they also close some of these credit lines as well.
Al: They did, in fact, in the late in 2007, ‘08, ‘09, that was my emergency cash fund, was a home equity loan. And then I realized. It didn’t work because it got shut down.
Joe: And then I cash out refinance. So some people do this, take the money out and then refinance the house and then you have some liquidity. So all these options today are probably not all that great just because of where interest rates are. But if interest rates go down, which they will, they fluctuate, they go up and down, for some people, it might be just a full refinance. Let’s say you have 15 years left and you’re 65 years old. So that mortgage is going to be with you for the next 15 years. So some strategies you might want to refinance just to get that payment as low as possible versus throwing a lot more liquid cash on that mortgage. Because what we see is that people take their liquid monies and they throw it at the mortgage and try to pay that thing off. They have a paid off home, but guess what? They have no liquidity. They have no- no other assets to create income.
Al: Yeah, Joe. Another thing I’ve seen is sometimes people will refinance as they retire- right before they retire to get cash out because maybe a couple years from then they start Social Security or they get some sort of pension. Maybe the pension starts or maybe the required minimum distribution starts and they’ve got a lot more money to pay this thing off. So it just depends.
Joe: Yep. Tax consequences. Well, a loan is not income, so it’s tax-free. So looking at different ways on how to bridge certain gaps. You’re absolutely right. This could be ideal for some people and it could be a complete disaster for others. When you start playing with debt and leverage, it gets very risky. So you want to make sure that you’ve got time and cash flow or you understand the risks if you’re doing any type of cash out refinance, refinancing at a higher rate, all sorts of different things.
Reverse Mortgage
Al: Now you can think about reverse mortgage. Now that’s just the opposite. Instead of getting money to pay off your loan, or to pull cash out I should say, and you’re making interest payments and principal payments. Reverse mortgage is just the opposite. Now you’re getting cash back or you’re paying off a loan or both. And now you’re not making payments. You get to live in the house. It has to be your principal residence and you have to stay living in the house. And you have to be at least 62 years old. So there’s a few requirements to get there. But the concept is, if you want to stay in your home, maybe for many years, decades, or even rest of your life, it could be a good option. There’s, there’s a few issues with it. You know, the interest rates generally a little bit higher, the fees are a little bit higher, so just be aware of that. When you’re thinking about that, look at all potential options.
Joe: When you look at a reverse mortgage, or it’s called a HECM as well, it’s a home equity conversion mortgage, there’s some strategies, is that if you open that up, you’re going to receive kind of a line of credit inside the home, so you don’t necessarily have to take money out. You don’t have to pay it off. You don’t have to take any cash, but you can create that line of credit within the overall home that you don’t have to pay back because the equity is paying that thing back. Again, there’s pros and cons, the fees could be potentially high, higher interest rates, right? People think they might get thrown out of their home. Sure, if you don’t pay your property taxes and there’s all sorts of different rules and regulations here, it’s just an option that people might want to consider as they continue to age through retirement and if their safety valve or their cash or liquid assets start drawing down.
Al: Right. And thinking about how much you can actually get is completely different rules than a regular mortgage. Because, first of all, regardless of your home value, if it happens to be over about $1,100,000, you’re, you’re, you’re limited to $1,100,000ish in terms of home valuation. And then how much you get is dependent upon the interest rates and your age. Generally, Joe, you hardly ever see anyone get more than 50% loan to value from their- their value.
Joe: So basically how it works is that, all right, I own the home and then I’m going to pledge my house to the lender, the bank, and then the bank’s going to pay me cash. I could get it in a form of a lump sum, I could get it as monthly payments, or I could say, you know what, I don’t want to pay any more monthly payments to my house. And then when I pass away, right, then that’s when that that debt is paid off, right? If there’s still equity in the home, which there should be, right? Well, then the bank gets paid at that point. So the bank gets paid at the end, right? And you get paid from that equity up front. So it’s just another way to think about a strategy to help you with cash flow potentially, give you some cash in hand.
Al: And I think it’s important to say the general rule, as long as you qualify and got the counseling, got loan, is if you pass away and there’s not equity, then the bank loses, right? And that’s partly why the bank only gives you a certain amount up front, is they want to have plenty of cushion, right? So it’s not like your heirs are going to have to pay off this debt. But what the downside is with higher interest rates and fees, there may be less equity in the future for the heirs.
Joe: When we get back, we’re going to talk about alternative situations, some unique things that you could potentially do as well, and then we’re going to turn the show back to you, to answer some of our viewer questions. If you need more help with this, you know where to go, YourMoneyYourWealth.com, click on that special option. It’s our Retirement Readiness Guide. Click on the special offer and you can download it for free. We got to take a break. We’ll be right back.
Andi: Do you know right now how likely you are to run out of money in retirement? There’s an easy way to find out. It’s also free. Go to EasiRetirement.com.
Joe: Hey, welcome back to the show. Show’s called Your Money, Your Wealth®. Joe Anderson here, I’m a CERTIFIED FINANCIAL PLANNER™ with Big Al Clopine, he’s a CPA. We’re talking strategies in regards to your overall home. Go to our website, YourMoneyYourWealth.com. Click on that special offer. It’s our Retirement Readiness Guide, Retirement Readiness Guide. Are you ready for retirement? YourMoneyYourWealth.com. Click on that special offer. Now let’s see how you did on that true/false question.
Al: Retirees 62 years old and older can take a reverse mortgage without going through counseling. True or false?
Well, that is false. And the reason it’s false is because reverse mortgages are complicated. They’re a great thing for some, not such a good thing for others. There’s complexities. You really got to understand what you’re getting into and whether this really makes sense.
Joe: Yeah. I mean, with the counseling, they’re going to check your eligibility. They’re going to look at the implications of the loan. They’re going to try to figure out other options as well.
Creative Alternatives
Joe: So, let’s look at some creative ways. Is there other things that you potentially can do, right, to create some additional income in retirement if you need some? How about rent out a room, Big Al?
Al: Nothing wrong with that.
Joe: You got a 4 or 5 bedroom right down the hall from your bedroom? There you go.
Al: I got two guest rooms. I could do that. And you, when the kids leave, How many you got? About 12 years.
Joe: Got a long way to go. Long way to go there.
Al: That’s true. It’s gonna be a while before you get to rent out a room.
Joe: I got about 16 years. But a lot of times people rent out a room, right? So, but I don’t know that there’s pros and cons here. Maybe if you have a basement or something, you put them in the basement.
Al: Actually, a friend of mine just did an additional dwelling unit in the garage, made a separate entrance, bathroom, stove, you know, bedroom, and is renting the garage, which now looks like a regular bedroom, kind of like a studio, and making actually pretty good money on it.
Joe: There you go. How about a little bed and breakfast? Big Al can cook you pancakes in the morning.
Al: I’d have to learn how to cook. You got a good cookbook for me?
Joe: No. But, you know, that’s kind of a cool idea. You know, depending on where you live. You can have a home-based business. I think that’s a pretty good one.
Al: Yeah, that, that one actually-
Joe: A little side hustle.
Al: – can apply to a lot of people. So you think about a home-based business. It could be anything like, I think you, first of all, think when you’re retiring and you’d like a little bit of extra income. Right. What did you do when in your career, can you do some kind of consulting role or can you do something related or maybe you’re sick of it? You want to do something totally different. The nice thing about a home-based business is you don’t have to worry about rent. You can just use your home. So you’re saving money on rent, right? And you get extra tax deductions. It’s a little complicated on what you can deduct, but you do get extra tax deductions for your home-based business. It can be a great way to create a little extra income.
Joe: Rent out your entire home. Yeah, then, get a tent.
Al: Live in a trailer.
Joe: Get in a tent. Stay in the backyard. And then just rent out your entire home.
Al: You got a vacation home. And you’re gonna go live in the vacation home for a while, right? So, rent out your primary or vice versa the rest of the time.
Joe: Alright, let’s switch gears. let’s flip the show to you. Let’s answer some of your questions.
Al: This is from Janice in Mercer Island. “Can I deduct my mortgage from my taxes if I have a home-based business?” Well, the answer is yes, you can. So, the way this works is you get to deduct your mortgage anyway, but not all of you are getting the benefit of that mortgage because maybe you don’t have enough deductions to itemize. So, all of a sudden now, you can take some of your home mortgage and you can deduct it against your business. How you do that, and same with property taxes, is you look at your square footage of your home office. Compared to the square footage of the total home, say it’s 10%, 20%, 25%, whatever it may be. That’s the amount of mortgage and taxes that you can actually deduct from your home business, which not only will reduce your income from your home business, but Joe, will also reduce your self-employment taxes, which can be pretty high.
Joe: Very good. That’s the CPA. Let’s go to the next one.
Al: I’ve got a question from Winston. “Do I need any special insurance if I rent my home on AirBnB or VRBO?”
Well, when it’s a great question, the answer is, yeah, you probably do. Because your regular home insurance probably won’t cover short-term rental. So the first thing I would suggest is you look at your insurance policy, maybe talk to your insurance agent if you’ve got one and see what’s covered and what’s not covered. And then, depending upon what you need, you may want to add on coverage. In some cases, you may actually want to get an additional policy.
Joe: All right, what did we learn today? Looking at your home and how do you figure out how that turns into an overall retirement income strategy? First thing is a lot of you downsize. I think that’s the most sensible here. It’s like, hey, I had a big family home. Maybe we sell that, we can take advantage of the 121 tax exclusion and offset any of the gains by $250,000 or $500,000. So that’s a lot more dollars into my pocket. Maybe we buy a smaller condo, something in the community. All right, downsizing. Another is that if you still have a long way to go on the overall mortgage, maybe you refinance it when rates are reasonable and then you can try to lower your payment as much as you can. Maybe open up a home equity line that you can tap into, a revolving credit line. So there’s different things there. Reverse mortgages, right? We talked a little bit about those and then looking at just getting creative. Yeah, we, we had a little bit of fun there, but you know, you can always be creative. It’s just trying to figure out, all right, well, what can I do to help supplement some of my income? Still have a little bit of fun and enjoy the retirement. just like you enjoyed this show. Go to our website folks, YourMoneyYourWealth.com and click on our special offer this week. It’s our Retirement Readiness Guide. YourMoneyYourWealth.com. Click on that Retirement Readiness Guide. Hopefully you enjoyed the show. For Big Al Clopine, I’m Joe Anderson and we will see you next time folks.
IMPORTANT DISCLOSURES:
• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC. A Registered Investment Advisor.
• Pure Financial Advisors, LLC. does not offer tax or legal advice. Consult with a tax advisor or attorney regarding specific situations.
• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.
• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.
CFP® – The CERTIFIED FINANCIAL PLANNER™ certification is by the Certified Financial Planner Board of Standards, Inc. To attain the right to use the CFP® designation, an individual must satisfactorily fulfill education, experience, and ethics requirements as well as pass a comprehensive exam. Thirty hours of continuing education is required every two years to maintain the designation.
AIF® – Accredited Investment Fiduciary designation is administered by the Center for Fiduciary Studies fi360. To receive the AIF Designation, an individual must meet prerequisite criteria, complete a training program, and pass a comprehensive examination. Six hours of continuing education is required annually to maintain the designation.
CPA – Certified Public Accountant is a license set by the American Institute of Certified Public Accountants and administered by the National Association of State Boards of Accountancy. Eligibility to sit for the Uniform CPA Exam is determined by individual State Boards of Accountancy. Typically, the requirement is a U.S. bachelor’s degree which includes a minimum number of qualifying credit hours in accounting and business administration with an additional one-year study. All CPA candidates must pass the Uniform CPA Examination to qualify for a CPA certificate and license (i.e., permit to practice) to practice public accounting. CPAs are required to take continuing education courses to renew their license, and most states require CPAs to complete an ethics course during every renewal period.
