An expanded fiduciary standard for financial advisers will put pressure on a variety of areas in the retirement income-planning profession.
On the horizon are clear regulatory directives that will force the industry to reduce conflicts of interest and increase focus on providing the best possible retirement advice to clients. The clients hungry for retirement advice today are primarily baby boomers, a generation that is financially unprepared for retirement.
As financial advisers assist their clients, there will be three major sources of wealth to utilize: retirement plan savings, Social Security, and home equity.
NON-EQUITY ASSETS SMALLER
In fact, the average married couple entering retirement will have roughly $192,000 in home equity but only $92,000 in non-equity assets, according to the U.S. Census Bureau. While advisers devote considerable time devising Social Security maximization strategies and calculating the best approaches to the investment and withdrawal of retirement plan assets, far too little time is spent on incorporating home equity into a comprehensive income plan. Although a fiduciary standard might not explicitly touch on housing wealth, there will be added regulatory muscle to consider all of a client's available assets in the development of their specific plan. Ignoring home equity and the leverage it potentially represents could raise red flags that the retirement adviser may not be doing everything possible to provide guidance in the best interest of the client.
1. Living in place: Most retirees want to stay in their own homes for as long as possible. As such, aging in place and maintaining their home can be the best strategy for many, especially those in early retirement. Sometimes they may need to modify their homes to accommodate needs once their health begins to decline.
2. Downsizing: This can be beneficial for those who want to relocate or need to free up home equity assets. It can allow movement to a more retirement-friendly community or a place closer to family. It also may free up cash to use for expenses or to reinvest in the market.
3. Refinancing: More retirees are entering retirement with a mortgage, which can create real stress on cash flow. For some, there might be an opportunity to refinance and get a lower interest rate or lower monthly payments by extending the length of the repayment period.
4. Special-purpose loan: For many, the home is the greatest wealth source in retirement. Some state and local governments have special-purpose loans to allow people, mostly low-income, to access their home equity through low-cost loans to pay for certain expenses, such as property and income taxes, or long-term care.
5. Home sharing: Renting a room or part of a home can be a good way to generate income. It can also provide companionship, and roommates can chip in for other costs, such as utilities. There are non-profit home-sharing organizations in over 20 states that assist seniors if they want to partner with others in their area.
6. Home equity line of credit: This can be helpful for short-term expenditures or major repairs, like a leaky roof. Borrowing through HELOC for 12 to 18 months can be far more beneficial than selling additional IRA assets.
7. Home equity conversion mort-gage line of credit: Perhaps the most interesting strategy is the use of a reverse mortgage line of credit, but the reverse mortgage needs to be incorporated into a comprehensive income plan. For instance, it can be set up at age 62 but only used when the retiree's investible assets have experienced a down year.
8. Sale-leaseback agreement: In the right situation, a retiree might benefit from selling his or her house to a family member or third party, who then rents it back. This strategy is most commonly used with family members, where the children purchase the parents' house.
INCLUDE IN OVERALL PLAN
Far too many financial advisers overlook home equity as part of a retirement income plan. With heightened regulatory concerns about doing what is in the best interest of the client, it would be prudent to explore and discuss home equity strategies with clients. Remember, there is no magic home equity strategy that always works best. As an adviser, you need to incorporate home equity solutions into the client's unique situation.
Jamie Hopkins is a professor of tax at the American College's Retirement Income Certified -Professional program. Follow him on Twitter @jamiehopkins521.