Open HELOC before retiring?

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Limoncello402
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Open HELOC before retiring?

Post by Limoncello402 »

I am retiring this year (December) and have noted that some suggest opening a HELOC before retiring. Pros and cons of doing this? I kind of hate to spend the money for/have an annual fee on something I may never use. My house is paid off.
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Re: Open HELOC before retiring?

Post by abuss368 »

I have mixed feelings. My folks retired and we discussed that but ultimately decided it was not needed. Since that time (almost 15 years) there has never been a need and everything has worked fine.
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Re: Open HELOC before retiring?

Post by 4nursebee »

My answer would depend upon ones overall financial picture, things like assets, income, expenses come into play.

We closed our HELOC before retiring as we had several years expenses in "cash" in addition to having base expenses covered by fixed sources.
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Re: Open HELOC before retiring?

Post by abuss368 »

4nursebee wrote: Sat Jul 04, 2020 1:56 pm My answer would depend upon ones overall financial picture, things like assets, income, expenses come into play.

We closed our HELOC before retiring as we had several years expenses in "cash" in addition to having base expenses covered by fixed sources.
That is the path my retired folks took as well.
John C. Bogle: “Simplicity is the master key to financial success."
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ResearchMed
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Re: Open HELOC before retiring?

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Limoncello402 wrote: Sat Jul 04, 2020 1:42 pm I am retiring this year (December) and have noted that some suggest opening a HELOC before retiring. Pros and cons of doing this? I kind of hate to spend the money for/have an annual fee on something I may never use. My house is paid off.
Try to get a HELOC that does not have any fees until/unless you actually access some of the money.

We have a HELOC like that.
The only cost would be if we closed it out within something like 3 or 4 months of having opened it.

Yeah, makes little sense, given we aren't paying anything regardless of how long we "don't use it".
Maybe they want to keep the potential "pot o' money" sitting there for one to think about for a few months...?

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Watty
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Re: Open HELOC before retiring?

Post by Watty »

I have one with a credit union that does not have any fees. The only "gotchas" are;

1) If I closed it out withing three years I would need pay back some of the fees that the credit union had paid when it was set up like for an appraisal and recording the lien.

2) When I eventually close it out there will be around a $100 fee that I will need to pay that my county charges to remove the lien.

Having a HELOC has come in very handy for managing my taxable income so I can get an ACA healthcare subsidy.
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Re: Open HELOC before retiring?

Post by bltn »

Part of retirement preparation is having a contingency fund of short term fixed income investment that can be sold in the event of an emergency. The interest rate you ll be giving up when liquidating this money is almost always less than the interest rate you ll be paying on a heloc loan.
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Re: Open HELOC before retiring?

Post by bltn »

Watty wrote: Sat Jul 04, 2020 2:09 pm I have one with a credit union that does not have any fees. The only "gotchas" are;

1) If I closed it out withing three years I would need pay back some of the fees that the credit union had paid when it was set up like for an appraisal and recording the lien.

2) When I eventually close it out there will be around a $100 fee that I will need to pay that my county charges to remove the lien.

Having a HELOC has come in very handy for managing my taxable income so I can get an ACA healthcare subsidy.
How does using a HELOC Help with ACA subsidies?
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Re: Open HELOC before retiring?

Post by abuss368 »

I have a small credit line with Wells Fargo. There if we need it. No fees. Not sure what we will do at retirement.
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ResearchMed
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Re: Open HELOC before retiring?

Post by ResearchMed »

bltn wrote: Sat Jul 04, 2020 2:14 pm
Watty wrote: Sat Jul 04, 2020 2:09 pm I have one with a credit union that does not have any fees. The only "gotchas" are;

1) If I closed it out withing three years I would need pay back some of the fees that the credit union had paid when it was set up like for an appraisal and recording the lien.

2) When I eventually close it out there will be around a $100 fee that I will need to pay that my county charges to remove the lien.

Having a HELOC has come in very handy for managing my taxable income so I can get an ACA healthcare subsidy.
How does using a HELOC Help with ACA subsidies?
I actually hadn't thought of this (but then, we are still using Employee Health Insurance, so it's not *yet* high on our list).

But for Watty, I'm guessing that at least one way is if one is withdrawing tax-deferred money for living expenses. That money is typically taxed as regular income.
If one can instead tap a HELOC (or other similar non-income source), then one may be in a lower "income bracket".

ETA: Or one could top off income with HELOC money, to avoid jumping into the "next" bracket?

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Re: Open HELOC before retiring?

Post by whodidntante »

I think so. It will give flexibility that you may not need, but sometimes it's useful.

Another rich person move is to use margin loans on taxable equities to avoid capital gains tax. Upon your demise, the estate pays off the loan and the stepped-up basis means the gains were never taxed. Since margin loans do not require payments to be made (so long as you meet maintenance margin) it does not create a cash flow burden to service the debt. I guess that's mainly useful if your taxable account is gigantic, but even the Boglerich can use it to manage taxable income in a given year for ACA subsidies or to stay within a certain marginal tax bracket. Morgan Stanley used to push using their low-cost margin loans/PAL loans, or whatever they called it for all kinds of situations, but a Boglehead wouldn't go near Morgan Stanley. IB is a better option.
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Watty
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Re: Open HELOC before retiring?

Post by Watty »

bltn wrote: Sat Jul 04, 2020 2:14 pm
Watty wrote: Sat Jul 04, 2020 2:09 pm I have one with a credit union that does not have any fees. The only "gotchas" are;

1) If I closed it out withing three years I would need pay back some of the fees that the credit union had paid when it was set up like for an appraisal and recording the lien.

2) When I eventually close it out there will be around a $100 fee that I will need to pay that my county charges to remove the lien.

Having a HELOC has come in very handy for managing my taxable income so I can get an ACA healthcare subsidy.
How does using a HELOC Help with ACA subsidies?
Two ways;

1) For use there is a cliff where if we have a dollar more taxable income than the cutoff amount then we would lose the entire subsidy for the year. For us that cliff amount is about $67K. If we are getting close to that then we can withdraw money from the HELOC instead of an IRA to keep below the cutoff amount.

2) The amount of the subsidy also varies with house much income you have. There are a lot of details but for us we get about 9.8% for every dollar that we can keep below the subsidy amount. This means that if we take out $10K in a HELOC instead of taking that amount out of an IRA then we will get an additional $980 subsidy. That is a lot more than the interest we would pay in the HELOC for a few months to shift the taxable income into the next year.

The details do get tricky since the HELOC will eventually need to be paid off so I am juggling that and how well that works depends on the details of your situation.
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Re: Open HELOC before retiring?

Post by FIREchief »

ResearchMed wrote: Sat Jul 04, 2020 2:02 pm
Limoncello402 wrote: Sat Jul 04, 2020 1:42 pm I am retiring this year (December) and have noted that some suggest opening a HELOC before retiring. Pros and cons of doing this? I kind of hate to spend the money for/have an annual fee on something I may never use. My house is paid off.
Try to get a HELOC that does not have any fees until/unless you actually access some of the money.

We have a HELOC like that.
The only cost would be if we closed it out within something like 3 or 4 months of having opened it.
^^ this. In 2016, we opened a HELOC at a major bank for free. The bank covered the appraisal and other fees (~$300) and the only stipulation was that we would have to reimburse them if we closed the HELOC within three years. We had no plans to sell the house, so proceeded with this plan. We never used it, but had a $100K credit line if it was needed (most likely for cash flow management).

Punch line: we ultimately decided to downsize and the house sold relatively quickly - 2 1/2 months short of three years.... :oops: Oh well.
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WillRetire
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Re: Open HELOC before retiring?

Post by WillRetire »

whodidntante wrote: Sat Jul 04, 2020 2:37 pm I think so. It will give flexibility that you may not need, but sometimes it's useful.

Another rich person move is to use margin loans on taxable equities to avoid capital gains tax. Upon your demise, the estate pays off the loan and the stepped-up basis means the gains were never taxed. Since margin loans do not require payments to be made (so long as you meet maintenance margin) it does not create a cash flow burden to service the debt. I guess that's mainly useful if your taxable account is gigantic, but even the Boglerich can use it to manage taxable income in a given year for ACA subsidies or to stay within a certain marginal tax bracket. Morgan Stanley used to push using their low-cost margin loans/PAL loans, or whatever they called it for all kinds of situations, but a Boglehead wouldn't go near Morgan Stanley. IB is a better option.
Very clever. Thank you for sharing & explaining. You've mentioned margin loans at IB in other posts, and your insights are excellent. Until I read your posts, I would never have considered a margin loan. Thanks!
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Re: Open HELOC before retiring?

Post by abuss368 »

One problem with having a LOC open is it may be temping to use it. When retired avoid debt if possible (unless there is a good reason).
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Re: Open HELOC before retiring?

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abuss368 wrote: Sat Jul 04, 2020 3:31 pm One problem with having a LOC open is it may be temping to use it. When retired avoid debt if possible (unless there is a good reason).
I'm sure you are correct for some folks. For many others (especially Bogleheads), this is a non-issue. 8-)
Last edited by FIREchief on Sat Jul 04, 2020 4:57 pm, edited 1 time in total.
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Re: Open HELOC before retiring?

Post by abuss368 »

FIREchief wrote: Sat Jul 04, 2020 3:46 pm
abuss368 wrote: Sat Jul 04, 2020 3:31 pm One problem with having a LOC open is it may be temping to use it. When retired avoid debt if possible (unless there is a good reason).
I'm sure you are correct for some folks. In many others (especially Bogleheads), this is a non-issue. 8-)
No doubt as Bogleheads are typically a lot more financially educated and disciplined!
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WillRetire
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Re: Open HELOC before retiring?

Post by WillRetire »

OP: Yes, it is a great idea to take out a very low or zero-cost HELOC while your income is highest in order to get the largest line amount and the best rate. Obviously, a HELOC is closed when you sell your house. A margin loan or Pledged Asset Loan (PAL) stays with you wherever you live. You can do both, as far as I know: the HELOC now and a margin or PAL loan later.
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Re: Open HELOC before retiring?

Post by Skeeter1 »

abuss368 wrote: Sat Jul 04, 2020 3:48 pm
FIREchief wrote: Sat Jul 04, 2020 3:46 pm
abuss368 wrote: Sat Jul 04, 2020 3:31 pm One problem with having a LOC open is it may be temping to use it. When retired avoid debt if possible (unless there is a good reason).
I'm sure you are correct for some folks. In many others (especially Bogleheads), this is a non-issue. 8-)
No doubt as Bogleheads are typically a lot more financially educated and disciplined!
I opened my HELOC rught before retiring as part of my financial planning! I knew that it would be easier to obtain while I was working. I at first used up some planned reserved cash to meet my monthly obligations. As a BH it was easy to ignore the HELOC, but glad that it was available as a safety net when I would need it.
The beauty of the HELOC is that you only take out exactly the dollar amount that you need and nothing more. You have an "interest" only option which is the one that I used. My rate was 1/2% below prime. This was in 2016. You could use that option for 5 years if you like.
Since I knew that after retirement that I would be downsizing in the next 5 years it was a win for me. I sold the house 2-1/2yrs. later. The balance of the HELOC was paid from the equity from the sale. Very sweet.
I recommend it to everyone.
PS. I did not tap into my HELOC for over 1-1/2 years and it cost me nothing to maintain during that period. If you never need it you do not use it and it costs nothing. It is a beautiful safety net.
All the best with your decission.
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Re: Open HELOC before retiring?

Post by abuss368 »

Skeeter1 wrote: Sat Jul 04, 2020 4:13 pm
abuss368 wrote: Sat Jul 04, 2020 3:48 pm
FIREchief wrote: Sat Jul 04, 2020 3:46 pm
abuss368 wrote: Sat Jul 04, 2020 3:31 pm One problem with having a LOC open is it may be temping to use it. When retired avoid debt if possible (unless there is a good reason).
I'm sure you are correct for some folks. In many others (especially Bogleheads), this is a non-issue. 8-)
No doubt as Bogleheads are typically a lot more financially educated and disciplined!
I opened my HELOC rught before retiring as part of my financial planning! I knew that it would be easier to obtain while I was working. I at first used up some planned reserved cash to meet my monthly obligations. As a BH it was easy to ignore the HELOC, but glad that it was available as a safety net when I would need it.
The beauty of the HELOC is that you only take out exactly the dollar amount that you need and nothing more. You have an "interest" only option which is the one that I used. My rate was 1/2% below prime. This was in 2016. You could use that option for 5 years if you like.
Since I knew that after retirement that I would be downsizing in the next 5 years it was a win for me. I sold the house 2-1/2yrs. later. The balance of the HELOC was paid from the equity from the sale. Very sweet.
I recommend it to everyone.
PS. I did not tap into my HELOC for over 1-1/2 years and it cost me nothing to maintain during that period. If you never need it you do not use it and it costs nothing. It is a beautiful safety net.
All the best with your decission.
A HELOC or LOC does provide a lot of flexibility to smooth out the peaks and valleys of needed cash.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Open HELOC before retiring?

Post by bltn »

Watty wrote: Sat Jul 04, 2020 2:55 pm
bltn wrote: Sat Jul 04, 2020 2:14 pm
Watty wrote: Sat Jul 04, 2020 2:09 pm I have one with a credit union that does not have any fees. The only "gotchas" are;

1) If I closed it out withing three years I would need pay back some of the fees that the credit union had paid when it was set up like for an appraisal and recording the lien.

2) When I eventually close it out there will be around a $100 fee that I will need to pay that my county charges to remove the lien.

Having a HELOC has come in very handy for managing my taxable income so I can get an ACA healthcare subsidy.
How does using a HELOC Help with ACA subsidies?
Two ways;

1) For use there is a cliff where if we have a dollar more taxable income than the cutoff amount then we would lose the entire subsidy for the year. For us that cliff amount is about $67K. If we are getting close to that then we can withdraw money from the HELOC instead of an IRA to keep below the cutoff amount.

2) The amount of the subsidy also varies with house much income you have. There are a lot of details but for us we get about 9.8% for every dollar that we can keep below the subsidy amount. This means that if we take out $10K in a HELOC instead of taking that amount out of an IRA then we will get an additional $980 subsidy. That is a lot more than the interest we would pay in the HELOC for a few months to shift the taxable income into the next year.

The details do get tricky since the HELOC will eventually need to be paid off so I am juggling that and how well that works depends on the details of your situation.
A good way to maintain some options.
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Limoncello402
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Re: Open HELOC before retiring?

Post by Limoncello402 »

Thanks for your answers. If I find a HELOC with no costs, I will open one, but so far I haven't.
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Re: Open HELOC before retiring?

Post by SQRT »

Limoncello402 wrote: Sun Jul 05, 2020 5:51 am Thanks for your answers. If I find a HELOC with no costs, I will open one, but so far I haven't.
We had Heloc’s when we first retired (2006). Provided some peace of mind during the 2008/09 crises although never used. About 7-8 years ago, I found out that my insurance company gave mortgage free discounts so I removed them, saved about $750 per year.

At this stage (70 years old) really don’t need them. Cash flow more than sufficient to cover expenses. Keep sufficient cash balances to meet any expense “lumpiness”. All non registered investment accounts have margin privileges so that is where I would go in a crises.

I think Helocs can be a reasonable part of a liquidity plan but work best if no fee. Really depends on your other finances. Ie net worth, sources of income, expense variability, age, etc.
GuyInFL
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Re: Open HELOC before retiring?

Post by GuyInFL »

Google no cost HELOC
This one was near the top.
https://www.alliantcreditunion.org/borr ... -of-credit
I dont have experience with them but there are plenty to choose from.
Great ideas about using HELOCs to smooth income. I'll have to think about using this to support Roth conversions.
Dandy
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Re: Open HELOC before retiring?

Post by Dandy »

I've almost always had an HELOC. I'm 72 and still have one -- though I see less need for it now. Since I didn't pay a fee to open one and have no annual fees I've kept it. It used to be one of the emergency fund options that I used on a rare occasion. I think it is usually a nice tool to have in the tool box as long as there are no charges unless you use it. On some occasions the bank offered very low teaser rates.

I will probably drop it in the near future.
carolinaman
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Re: Open HELOC before retiring?

Post by carolinaman »

I have had a HELOC for 20+ years (retired 10 years). I have used it for remodeling, car purchases and similar things but always aggressively pay it back. In retirement, I can use my cash accounts, so have not used it as much. But it is a handy thing to have as a quick source of cash provided there are no fees or other costs to it when not used.
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