THE CASE OF THE MISSING $40,000

    Rob is retiring at age 62 and his income is going down from $100,000/year to $40,000/year. He wants to live on $80,000/year, so he’s short $40,000/year. He is thinking of taking early social security distributions. Rob has some money saved in his taxable retirement accounts. Our mission is to help Rob make a smart choice. Most people only see two options. (1) Take early social security distributions; or, (2) Dip into the retirement accounts.

    But we’re not most people. We see a third option. Rob owns a home that’s worth $500,000 with no mortgage. We wonder what it might look like if Rob taps into this home equity in order to make up for the $40,000 of income that he needs (see illustration above):

    • Option #1 in this scenario would be for Rob to withdraw $50,000 per year from his investment accounts. Remember, if he needs $40,000 per year, he’ll need to gross up that amount in order to withdraw enough money to pay 25% taxes and walk away with $40,000 net. In this case, Rob would be reducing his investment accounts by $53,333 per year, and he’d be losing $13,333 per year in taxes.
    • Option #2 in this scenario would be for Rob to take out early social security distributions for some portion of the funds and withdraw the remainder of the funds from his investment accounts. With this option, Rob would still be losing the opportunity cost on some portion of the investment funds, and he’d still be liable for approx. $6,000 – $13,000 per year in taxes.
    • Option #3 is for Rob to open up a HECM line of credit and withdraw $40,000 per year from the line of credit. In this case, Rob would preserve his retirement assets and avoid taking early social security distributions. He’d also save about $13,333 per year in taxes.

    Let’s assume Rob implements option #3 for five years. There are four main benefits to using the HECM line of credit in this example:

    1. $66,665 tax savings over five years
    2. Compounded growth in the investment accounts for another five years
    3. Retirement funds last longer (at least another five years plus the accumulated growth in the accounts)
    4. Rob is able to delay social security distributions and end up with more in the long run

    As you can see, the HECM opens up lots of financial possibilities!

     Please contact me for more information.

     

     

    PLEASE NOTE: THIS ARTICLE AND OVERVIEW IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX, OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED TAX AND INVESTMENT ADVISOR FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION.

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