The Retirement Income Source Most People Overlook
You have spent decades building equity in your home. Here is how it can work as part of your retirement income plan.
Most people in their 50s and early 60s have a rough sense of where their retirement income is going to come from. Social Security. A 401(k) or IRA. Maybe a pension. What almost nobody includes in that list is the asset they have spent 20 or 30 years building equity in.
The average American has more than 70% of their net worth tied up in their primary residence. For most people that equity just sits there, treated as either a safety net of last resort or something to leave to the kids. But home equity can function as a genuine retirement income source. And there are planning strategies that let you use it for income now while still protecting what passes to the next generation.
What a HECM Is and How It Works
A Home Equity Conversion Mortgage, or HECM, is a reverse mortgage product backed by the Federal Housing Administration. It is available to homeowners 62 and older and allows you to borrow against your home equity without making monthly payments. The loan is repaid when the home is sold, the last borrower passes away, or moves out permanently.
A few things about HECMs that tend to surprise people:
You never give up title to your home. It remains yours throughout.
You can never owe more than the home is worth at the time of sale.
You cannot be forced out as long as you pay property taxes, maintain insurance, and keep up the property.
Once established, the credit line cannot be canceled by the lender regardless of what is happening in financial markets.
An unused HECM line of credit grows over time, meaning the longer it goes untouched the larger the available reserve becomes.
Smart Ways to Use a HECM That Have Nothing to Do With Running Out of Money
The TV commercials position reverse mortgages as something people turn to when they have no other options. The planning reality is different. Some of the most effective uses of a HECM are by people who have other assets but want to coordinate them more intelligently.
During a significant market decline in the early retirement years, drawing from a HECM line of credit instead of selling investments at a loss gives a portfolio time to recover. The home equity absorbs the short term impact rather than permanently locking in a loss in your retirement accounts.
A HECM can also serve as a bridge to a higher Social Security benefit. Every year you delay Social Security past full retirement age, your monthly benefit grows. HECM proceeds can cover living expenses during that delay so your Social Security benefit continues to increase untouched.
Using Home Equity for Income While Still Protecting the Inheritance
One of the most common reasons people hesitate to use home equity during retirement is the concern about what is left for their kids. If you draw down equity over time, the home may carry a loan balance when you pass away, which means the inheritance looks different than expected.
One approach worth exploring: pairing a home equity strategy with a permanent life insurance policy. The home equity provides income during your lifetime. The life insurance death benefit gives heirs the funds to pay off any remaining balance and keep the home in the family if that is a goal.
The concept in plain terms
You unlock an asset that has been sitting in your home and use it to improve your retirement income picture. A life insurance policy fills the gap for your heirs so the home equity you spend does not come at the expense of what you hoped to leave behind. Done correctly, you get both. Whether this makes sense depends on your health, your insurability, the cost of coverage, and how your overall estate is structured. It is a planning concept that deserves a real conversation rather than a quick answer either way.
Who This Conversation Applies To
If you own your home, have built meaningful equity, and have not thought carefully about how that equity fits into your retirement income plan, you are in good company. Most people have not. The home is often the largest single asset in a household and the least incorporated into retirement planning. That gap is worth closing before you are drawing down everything else.
Alfred Edmonds is an Investment Advisor Representative at Cetera Investors in San Jose, CA. He specializes in retirement income planning for California educators, pre-retirees, and high net worth individuals. This content is for informational and educational purposes only and does not constitute financial, tax, legal, or insurance advice. HECM products carry specific terms, costs, and eligibility requirements. Life insurance products vary by carrier and are subject to underwriting. Please consult a qualified financial and insurance professional regarding your specific situation. A diversified portfolio does not assure a profit or protect against loss in a declining market.