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Get smart with your money

Retirement

Your house isn’t a piggy bank

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Your home equity could keep you afloat in retirement or bail you out in an emergency — but not if you spend it first.

U.S. homeowners are sitting on nearly $6 trillion of home value they could tap as of May 2018, according to data provider Black Knight. Lenders are eager to help many do just that through home equity loans, home equity lines of credit and cash-out refinancing.

The rates are often lower than other kinds of borrowing, and the interest may still be deductible, despite last year’s tax reform changes. But you can lose your home to foreclosure if you can’t pay back the loan, which is why financial planners generally frown on using equity for luxuries, investing or consolidating credit card debt.

Many planners point to the foreclosure crisis that started a decade ago as an example of what can go wrong when people binge on home equity debt.

In my latest for the Associated Press, why it’s dangerous to treat your house like a piggy bank.

Friday’s need-to-know money news

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Today’s top story: How couples with kids retired early. Also in the news: 5 credit card tips to take to college and beyond, how a self-taught baker became a rising entrepreneur, and what not to do when hiring a lawyer.

How They Retired Decades Early — With Kids
How two families pulled it off.

5 Credit Card Habits to Take to College and Beyond
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How a Self-Taught Baker Became a Rising Entrepreneur
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What Not to Do When Hiring a Lawyer
Save on fees when avoiding these mistakes.

Thursday’s need-to-know money news

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Today’s top story: Understanding what colleges are looking for. Also in the news: How a self-taught baker became a rising entrepreneur, 3 credit score myths you should stop believing, and what to do when you’re worried you’re going to retire broke.

What Do Colleges Want? It’s Hiding in Plain Sight
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How a Self-Taught Baker Became a Rising Entrepreneur
Keiyana Roberts is getting it done.

3 Credit Score Myths You Should Stop Believing
Busting credit score myths.

Worried you’re going to retire broke? Help could be closer than you think
Finding help at work.

Managing Debt in Retirement Takes Some Planning

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Owing money in retirement isn’t ideal — but most people do.

Seventy percent of U.S. households headed by people ages 65 to 74 had at least some debt in 2016, according to the Federal Reserve’s latest Survey of Consumer Finances. So did half of those 75 and older.

Paying debt usually gets more difficult on a fixed income. Mortgage debt, especially, can be a huge burden in retirement. Retirees may have to withdraw larger amounts from their retirement funds to cover payments on debt, which can trigger higher tax bills and increase the chances they’ll run short of money.

People have the most options to deal with debt if they create a plan before they retire, financial planners say. Refinancing a mortgage, for example, is usually less of a hassle while people are still employed. It’s also typically easier to generate the extra income that may be needed to pay off debt.

“It is much easier to keep working for another year or two than to try and come back into the workforce when they are older and the employer needs have changed,” says Linda Farinola, a certified financial planner in Princeton, N.J.

In my latest for the Associated Press, three loans to consider before you stop working.

Q&A: Should a soon-to-be retiree use savings to pay off the mortgage?

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Dear Liz: I am 64, single and planning to retire in two years. I have saved enough to pay off my $100,000 mortgage. It will take the bulk of my savings but I have no other debts. I will have a pension and Social Security. I also have a credit score over 800. Should I do this?

Answer: Being debt free in retirement is wonderful, but being stuck short of cash is not. It’s a particularly bad idea to use pretax money from retirement accounts to pay off a mortgage. Not only can the withdrawal trigger a big tax bill, but it may push you into a higher tax bracket for that year and cause other unexpected tax consequences.

Even if your pension and Social Security cover your expenses now, that probably won’t be the case for the rest of your life. For example, Medicare covers about half of the typical retiree’s medical costs, and doesn’t pay at all for most long-term care expenses if you should need those.

You could pay off the mortgage and then arrange a home equity line of credit you could tap for such expenses or for emergencies. Just be aware that lenders can freeze or close lines of credit at their discretion, so it won’t be the same as having cash on hand.

Decisions made about retirement are complex and often irreversible. Consider consulting with a fee-only financial planner about your retirement plans so you better understand your options and the consequences of the choices you’re making.

Friday’s need-to-know money news

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Today’s top story: Getting by on the average retirement income. Also in the news: Tips on back-to-school shopping, how to profit from someone else’s financial mistake, and how to decode your credit card bill.

Could You Get By On the Average Retirement Income?
Where does that income come from?

Cross Items Off Your Back-to-School List With These Tips
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How to Profit From Someone Else’s Financial Mistake
Saving on someone else’s purchases.

Decoding Your Credit Card Bill
Understanding the terms.