This is a critical question and a perceived roadblock that many face as they approach the magical transition time we call retirement. I believe Covid may have changed many folks’ vision of retirement as well. So I am curious, what goes into your discussion with your clients and their families on Retirement related to real estate and mortgage?
Is a mortgage getting in the way of someone retiring or putting them behind schedule for this magical date? How does Real Estate planning fit into Retirement planning?
Because of the many conversations I have about this, for each of my clients I like to have a heart-to-heart consultation at least five years from retirement on their plans and how real estate fits into it. What needs to happen where they can hit their retirement age with confidence that they will not outlive their portfolio of assets and survive downturns in the market while in retirement?
If the client is at or in retirement, then the consultation is quite different and a solution/plan must be different.
But in either situation I describe above using Home Equity and Real Estate as an asset in their portfolio seems very important, even for HNW clients.
Last December there was a great article in the FPA magazine written by Phillip Walker, Barry Sacks and Stephen Sacks on the subject of including Home Equity as a Non-Correlated Asset in a Portfolio. What was amazing to me was how skipping two withdrawals from the client’s portfolio during market downturns made a MASSIVE difference in the performance of the overall investment account. Check out this chart:
You can clearly see how different the value of the portfolio looks like when using home equity during a downturn in the market. Which leads me to this quote from the article:
Another essential tool for risk reduction, but one not adequately recognized by financial planners, is the inclusion of home equity in the retirement portfolio, as an asset along with, and similar to, investment securities. An essential aspect of the inclusion of home equity in the portfolio is a withdrawal strategy that, in a disciplined way, uses that asset.
“A WITHDRAWEL STRATEGY”, yes that is so important to reduce the sequence of returns risk. So what is my process?
STEP 1 (ANALYSIS): Fully understanding where the clients are in their retirement goals and aligning this current day reality with those goals and then determining where does real estate holdings and the mortgage fit into this equation?
STEP 2 (APPLICATION): Develop mortgage plan to ensure they are growing and protecting assets in the coming years.
STEP 3 (ACTION): As they enter retirement ensure access and control of home equity to navigate Sequence of Return Risk and deal with portfolio volatility.
This is often done with a line of credit and not a traditional first mortgage. Did you know that there is a line of credit that is also a “Reverse” mortgage which requires no repayment while living?
I will leave you with this last quote from the FPA article:
The adverse effects of regularly distributing from a volatile portfolio can be substantially diminished by distributions from the home equity instead of the other portfolio assets whenever determined by the algorithm described.
That solution is the inclusion in the portfolio of another asset, one whose value is not correlated with the volatility of the securities’ values.
Thank you for taking the time to read this and please let me know if you need the link to the FPA article. Send me an email I will get it right over to you. If you would like to schedule a 15 minute call to discuss this or other issues your clients may have, again just send me an email.