Home equity to the rescue.

As you grow older, this question becomes less of a creative brainstorm and more a burning question to answer and work towards. And, the sooner you begin planning for retirement, the better. But the question is, how much do you need to save to be able to live the life you want to?

Finding the right amount to save

To get started, assess your current and future income and identify your ideal retirement lifestyle, along with its associated costs such as taxes and medical payments. Then calculate how much you would need to save. You can use different rules of thumb to measure as well;

• The 80% rule dictates saving enough to replace 80% of your income in retirement years.
• The 10x rule suggests you save 10 times your salary by the time you plan to retire. 
  

Everyone's needs and goals are different, which will impact the savings rule you apply. If you’re not confident that your income can match your retirement plan then consider adding your home equity to the mix. 

Home equity is the amount of ownership you have in your home. Typically home equity is a big chunk of a retiree’s net worth and it can help you support your retirement plans in multiple ways, such as taking out a home equity loan, home equity line of credit (HELOC) or a reverse mortgage. 

Home Equity Loan

A home equity loan - also known as a second mortgage - allows a homeowner to get a lump sum of cash when opening the loan. These are fixed-rate loans of typically 5, 10 or 15 years, for which repayment usually starts immediately. 

You have the freedom to use the cash as you please but we recommend using it to fund important projects as opposed to bucket list items, because if you default on loan payments, you risk losing your home. For example, if you are eager to age-in-place, but need to make some renovations to optimize your home for an older you, a home equity loan could be a smart option.

Home Equity Line of Credit (HELOC) 

Unlike a home equity loan, there’s no lump sum payout when you take out a home equity line of credit (HELOC). Instead, you get a line of credit to tap into at any time during the initial phase of the HELOC, called the draw period. 

These are typically variable rate loans, meaning the interest rate is dependent upon the fluctuation of the benchmark index used by your lender. No interest is charged until you use any amount of the credit line but if you are concerned about changing interest rates then a hybrid fixed-rate HELOC may prove more feasible for you. 

Financial advisors recommend retirees consider a HELOC “for flexibility” if a big cost pops up, but for planned costs such as renovations, a fixed rate home loan may be a safer bet. 

Reverse Mortgage 

Reverse mortgages have earned themselves a bad reputation over the years which has led seniors to either not be familiar with the concept or be wary of it due to a fear of ‘getting scammed’. They are not the carefree way of putting more cash in your pocket as they’re peddled to be. 

For those with limited access to funds and a sizable amount of equity in their home, reverse mortgages can be beneficial. You can either cash out all your equity or opt to receive smaller amounts on a monthly basis over a longer period of time. Whatever option you prefer, be sure to consult a loan specialist because reverse mortgages are more complex than a HELOC or home equity loan. 

Downsizing

Before you decide to age-in-place at your home, take a moment to consider the upside of moving. For starters, you can drastically reduce your monthly housing and house maintenance costs, especially if you have an empty nest. You could move to a smaller, less expensive place in your locality, or relocate to a less-expensive, more climate-friendly spot. And let's not forget there’s also the potential to pocket enough profit on the sale to add to your retirement investments. 

If you can, we recommend strategically reinvesting your assets and allowing them to grow over time for an added layer of financial security but be sure to run the numbers with a financial planner before you make a big decision.