We all know it is important to plan for retirement and your own Chapter 2. Most people think about having enough money in the bank, maybe paying off their house, or downsizing to lower their monthly expenses. But what about a way to have enough cash if things go sideways as they did in 2008 or the total weirdness of 2020. One way to give yourself a cushion is to take out a HELOC on your home BEFORE you quit working.
I am not a financial professional. Please consult one before taking any action on the ideas presented below.
Cash Is King
While you are still working for a living, many financial experts recommend keeping a cash fund to cover up to 6 months of expenses in case you find yourself unexpectedly “between jobs”. Similarly, experts often recommend holding up to 5 years of expenses in cash once you retire. So that you don’t have to sell investments during a recession, or incur huge taxable events to fund your lifestyle. That’s a lot of moola to keep around.
One way to get around setting that amount of cash aside is to have access to a line of credit based on the equity in your house. A line of credit is a kind of loan where you can take cash out as needed and only pay interest on the money borrowed, not the amount available. Fees for setting up such a loan can be very small.
A Home Equity Line Of Credit (HELOC) is a type of loan that is secured by the equity in your home. A HELOC can give you access to cash when you need it and not cost you much when you don’t. We had a HELOC during the 2008 financial crisis and it gave me a lot of peace mind since I didn’t have to worry about how I might pay the bills if I was between jobs.
No Income, No Loan
Banks and credit unions are the most common HELOC providers. Unfortunately, banks strongly prefer to provide loans to people with income, like from a job. Once you retire, you may not have enough income to qualify for a HELOC. There are lenders you can turn to if you have little income, but their fees and rates can be much higher than traditional lenders.
By getting a HELOC while you still have a job, you can qualify for lower rates. You can do this even if you plan to retire shortly (they won’t know your plan). Moreover, having a HELOC in place can make life easier if jobs become harder to get as you age (ageism is “alive and well” in the workplace).
This way, you can have access to cash at more attractive rates than if you waited to get a loan when you are no longer employed.
What If You Plan To Move When You Retire
Obviously, the bank will get repaid any money due from the HELOC when you sell your house. If you plan to move when you retire and you think a HELOC would be helpful after you retire. You might also consider moving to your new home before you retire. Then you can get a HELOC while still employed and start Living Chapter 2 with access to cash that allows you to sleep well at night.
How do you plan to cover unexpected expenses?