When it comes to retirement assets, real estate is part of the conversation for some clients, but it’s not a stretch to say the typical advisor/client retirement conversation revolves around liquid assets, such as stocks and bonds.
Deeper dives consider assets such a client’s cash holdings, employer-sponsored plans, taxable brokerage accounts, annuities, defined benefit pensions (when applicable) and Social Security payments, among others. Yes, real estate is frequently part of the conversation, but often when an investment property is involved – a scenario that doesn’t apply to most clients.
In other words, clients may be overlooking the utility of their primary residence as a key retirement asset. Data confirm it’s a conversation worth having, particularly with baby boomer clients and not just because they account for the bulk of pre-retirees and retirees in this country.
By some estimates, 78% of baby boomers own their primary residence – an extremely high percentage when considering they account for just 20% of the population. For the sake of argument, say eight in 10 boomers own their homes, but it’s fair to say the percentage using those properties as retirement assets are far lower.
Homes Could Be Retirement Gold Mines for Clients
The retirement crisis has received ample, warranted attention because the stark realities are defined benefit pensions are less accessible, concerns about the health of Social Security are rampant and many workers feel their retirement savings are inadequate.
For clients that are fortunate enough to own even just one house, there are myriad ways in which that property can be tapped to shore up retirement positions. One of the traditional approaches is to simply sell, downsize to a less expensive property and use the profits to bolster retirement savings. It’s a fine idea for many clients, but advisors need to ensure clients are aware of the tax implications.
“Before you put your house on the market, however, it's important to understand the potential capital gains tax liabilities,” notes Chris Kawashima of Charles Schwab. ”Sellers can exclude the first $250,000 in profit ($500,000 for married couples filing jointly), provided they've owned the house and used it as a primary residence for at least two of the past five years. ”
For clients that are flush with liquid assets and/or those that own multiple properties, renting out the primary residence is a solid idea for generating steady income in retirement. That strategy has some perks of which some clients may not be aware.
“A rental property can provide not only income but also potential tax benefits. For example, you may be able to deduct certain expenses, such as depreciation and repairs, from your annual rental income,” adds Kawashima. “Keep in mind, however, that any taxable rental income could potentially push you into a higher tax bracket or impact how much you pay for Medicare premiums. ”
Considering HELOCs
A home equity line of credit (HELOC) could be an avenue to consider for some retired clients, but in the essence of prudence, it’d be best to discuss this option with retirees without mortgage obligations or those with low monthly payments.
HELOCs provide upfront cash to approved borrowers, but these loans are likely any other in that they create long-term obligations for the borrower and that might be unappealing to clients looking to enjoy a worry-free retirement.
“HELOCs generally have variable interest rates, meaning that your scheduled payments could rise due to economic conditions beyond your control. Other risks include having negative equity on your home should its market value drop below the total amount you owe, and—if you fail to make payments—foreclosure of your home,” concludes Kawashima.
On those notes, clients expressing interest in HELOCs as a retirement support vehicle should be illuminated to the risks mentioned above and informed that their heirs will be on the hook for the payments when they pass on.
