The Importance of a Home Equity Line of Credit

Transcript

 If you actually own a home, it's important to establish a HELOC, a home equity line of credit as a break the glass emergency contingency plan so that we do not have to deplete our valuable retirement savings if there's an emergency.

Or a contingency or the root caves in, or you have a family member that needs help, or someone is has a health issue that you have to write a big check for. We want to be able to break the glass and have a home equity line of credit available so that you do not have to deplete your retirement savings.

I'm going to show you why, but this is something that is important to do while you are working, because when you go to apply for a home equity line, they want to see that you have income. So when you retire is very difficult to have a home equity line set up and that's why it's so important.

Now, I talked about having 2 years of your withdrawals in cash. In the example that I gave for Carol, she wants $10,000 a month to start her retirement. So that means she needs $240, 000 to support herself for the first two years of retirement. Now that's a lot of money. That's why I'm saying these are things that you need to start to think about before you retire.

So the way this works is we have two years of cash available throughout your retirement, the entire retirement phase. We want two years in cash. I want three to 10 years in a bucket that is outside of your retirement account. Outside of a 401k account outside of an IRA account to replenish this bucket.

So in the 3 to 10 year bucket, we're going to have bonds, things that are more conservative, things that are more safe, things that are more predictable bonds that have a maturity date. I'm going to get some interest on those bonds. The interest pays back to replenish this bucket. I may have some conservative stocks here, dividend paying stocks, the dividends go to replenish this bucket as those bonds mature.

Then we take those bonds and replenish the bucket as well. Now, what happens is because I have two years of cash available and I have another backup bucket with three to 10 years of conservative investments. I'm able to weather periods like this. So this is how we protect against that sequence of return risk.

You're retired. And the market tanks, but we're not selling any stocks at fire sale prices to help you live to give you money to live on. What we do is opportunistically when the market is up, we're selling stock and replenishing this cash bucket so that the interest is going into this cash bucket.

The dividends are going into this cash bucket as bonds mature. It goes into the cash bucket, any stocks in this bucket when the market is up. Okay. We can opportunistically sell those stocks in an upmarket and replenish this bucket. We want two years of cash available to you at all times for the rest of your life once you retire.

And this long term bucket, this is where we're going to hold most of the money in retirement accounts. This is where the money will be for the Roth accounts, the 401k accounts, the IRA accounts. We want to set this up and set this up systematically over time.

I also mentioned that you should be very slow, very reluctant to part with lump sums of money. So when you retire, you start to think in different terms of how you view your assets. So you do not want to write big checks in retirement if you can avoid it. So you don't want to write a check and just pay off a car.