In general, people have a tendency to put aside money for accomplishing different tasks they’d like to achieve in their lives. Maybe there’s a swear jar on the kitchen table to try and dissuade the occasional curse word from slipping out around the kids, or maybe a couple has a specific bank account dedicated to saving up for a house. It’s this idea, called “bucketing,” that could be key to the greater incorporation of home equity into retirement.
This is according to Jamie Hopkins, director of retirement research at Carson Group in a new column at Forbes.
“Home equity is often forgotten as a potential retirement income source,” Hopkins writes. “If you do bucketing correctly and in a holistic manner, your home should be in the plan.”
One of the reasons this should be the case, Hopkins says, is because the home is more than simply a financial asset, but a sentimental one, as well. This makes some homeowners more reticent to call on the home’s equity in retirement.
“A house is also a liability for many people,” he says. “Housing expenses tend to be the largest expenditure for Americans at over 37% of their budget. So under one roof is an asset that has sentimental value, financial value, a liability aspect and provides shelter, a need everyone has. When you try to figure out which bucket your home fits in, take into consideration all those roles a home plays.”
There are often three different types of “buckets.” Bucket one contains the safest assets like cash, bucket two contains more fixed income products and balanced investment strategies to take care of nearer-term needs, and bucket three contains growth assets to use for expenses in the long term, Hopkins says. In terms of drawing on your home equity, a line of credit as provided by a reverse mortgage has some advantages in terms of where the bucketed money is segmented.
“One benefit of using a reverse mortgage line of credit or traditional line of credit in a bucketing approach is that you can lessen the money you need in bucket two,” Hopkins says. “By having a line of credit open, you can borrow from it to fill income needs during a market downturn. This way, you won’t have to sell off any assets in bucket two to generate your cash flow. Instead, those assets can continue to grow, also protecting you from sequence of returns risk.”
Another option can be to refinance an existing, forward mortgage into a reverse mortgage in order to do away with the monthly mortgage payment entirely, he says.
“Since no monthly payments are required with a reverse mortgage, you can opt to never make a payment, or adopt an even more nuanced approach where you make voluntary payments to interest,” Hopkins says. “The voluntary interest payment strategy provides that you go ahead and make interest payments on the reverse mortgage when times are good. […] But when times are bad, cease making payments because cash flow will be most important while you wait for your savings to recover and start growing again.”
Other strategies for bucketing in retirement with home equity can include downsizing to free up equity, or attaching a projected growth rate to the home as a long-term investment.
Read the column at Forbes.