How to Use a Home Equity Line of Credit (HELOC) in Retirement

Many people strive to pay off all their debt before retirement. While this is a great goal, there are some types of borrowing that can make sense even once you are retired. A home equity line of credit—often referred to as a HELOC—is one type of debt you may want to consider using, even after retirement.

Here are five ways a home equity loan can be used to manage your cash flow and account withdrawals.

Auto Purchases

When planning for retirement, many people put together a basic budget and forget about expenses like buying cars or other things that may only occur every five or 10 years. If most of your money is held inside retirement accounts like IRAs and 401(k)s, then each time you make a withdrawal, that amount will be included as taxable income on your tax return that calendar year.

If you take a large withdrawal one year to fund a big expense, it may push you into the next higher ​tax bracket. For example, if your normal withdrawals were taxed at 15%, you could be taxed at 25% if you take more out. In these situations, it may be smart to use a HELOC to fund a large purchase, so you can pay it off gradually without taking a big taxable withdrawal all in one year.

Home Repairs

Just as with auto purchases, many people forget about the cost of home repairs when putting together their retirement budget. This is one of the items we refer to as a retirement budget killer. If you spend 20 to 30 years in retirement, your home will likely need some work done during this time.

A HELOC can provide an alternative to selling investments or taking large retirement account withdrawals. By borrowing the funds, you can gradually repay the money rather than disrupting your portfolio.

Alternative Source of Cash in Down Market

Managing money for retirement is quite different than managing money while you are in the accumulation years. Once you are taking regular withdrawals, a down market can have a more severe impact on you. In technical terms, this is referred to as “sequence risk.”

If you can either avoid or lower withdrawals in down years, you can increase the expected life of your portfolio and your potential lifetime income stream. A home equity line of credit can be used for this purpose—an alternative source of cash in down years, then you gradually repay it as your portfolio recovers.

Helping the Kids

Have an adult child who is moving, going through a period of unemployment, or otherwise needs assistance? Or maybe they need funds to start a business or buy a home. Many parents lend their adult children money, and the children repay their parents when they are able.

Whatever the reason, if you will incur tax consequences by selling investments, you might consider borrowing instead. If you have established a HELOC, it can be there waiting for you to use in these circumstances.

Funding a New Home Purchase

Many people retire, and within five to 10 years they decide to move. Whether it's being closer to grandkids, searching for a new climate, or something else, sometimes it just happens—even if it wasn't planned. In most of these cases, a new home is purchased before the old home is sold.

By borrowing against your home equity, you can often fund the down payment on the new home. Once again, this may be a better solution than liquidating investments, as selling investments will entail trading costs and tax consequences.

The Bottom Line

Applying for a home equity line of credit in retirement can make a lot of sense. Of course, you must have equity in your home. As long as you do, it doesn’t matter if your home is paid off or if you still have the first mortgage.

The key thing to remember is that you need to build your new loan payments into your retirement budget. Unless you’re moving soon, you’ll want to plan on repaying what you borrowed so you can use the line of credit again down the road if you need to.