Clients need guidance with their largest financial asset, which is typically their home.
The financial firepower embedded in home equity is too large to ignore, especially with many mid-market and mass-affluent clients facing long retirements and uncertain futures.
Housing exerts an outsized influence on both sides of the balance sheet.
Consider expenses and liabilities. Although much ink is spilled describing the shockingly high health care costs during retirement, housing represents the largest retirement expense by far.
Total housing expenses accounts for 37% of total income for adults over 75, according to the annual Consumer Expenditure Survey compiled by the Bureau of Labor Statistics.
On the asset side of the balance sheet, housing also dominates.
Housing is the largest source of wealth for Americans over 65, according to a 2010 Boston College Center for Retirement Research, “Using your house for Income in Retirement.”
On average, the value of housing equity is about 35% higher than the total value of all financial assets such as savings, brokerage accounts and retirement accounts.
Here are two ways to help clients manage their unique housing asset.
1. The paid-off mortgage trap. Many clients think that they should pay off their mortgage before they retire. This is fine if they have adequate financial assets.
But it isn’t for everyone, not if paying off the mortgage crimps cash flow, leaving a client without adequate liquidity for emergencies, repairs, health events and other expenses. This is especially true in this era of historically low mortgage rates when the cost of borrowing is so low.
Advisers can help some clients by modeling cash flow, showing them how carrying a mortgage can be offset by preserving more investment principal while simultaneously keeping some financial liquidity.
2. Getting the equity back out. On the flip side, once equity is in the house, it is important to keep abreast of the options to take equity back out if needed, most commonly with either home equity lines of credit or reverse mortgages.
Reverse mortgages, in particular, continue to evolve and are gaining more acceptance as prudent strategies for the right clients. They now offer greater safety via federal insurance and pre-screening of applicants.
Reverse mortgages also benefit from current low interest rates, since lower interest payments mean higher potential payouts to borrowers.
Helping clients manage the sometimes underappreciated asset in home equity should definitely be part of an adviser’s retirement planning toolkit.