cash flow management using a LOC

[67walkon]

Here's a question to ponder. At least I'm pondering it.

I'm in transition from full time to part time this year to fully retired. Maybe I'll make it before 65, but if I don't have to work too hard, make a little money and enjoy it, it's okay.

We're trying to determine a cash management plan for the next phase of our lives. Our mortgage is low enough that we can pay it off and even if we don't, it's gone in about 5 years. We have discussed paying off the mortgage with either cash or using the home equity LOC--the rate on the LOC is something like 2.5% right now, but variable, and the rate on the mortgage is fixed at 4.5%. We're playing with those numbers.

The new question that occurred to me is whether one might use a HELOC in retirement to even out cash flow rather than having a year or more's worth of expenses in a non or very low interest rate cash account. So long as the rates stay low, which the Fed is saying will continue for another 2 to 3 years, I'm pondering whether we would be better off using the LOC to fund expenses and put the cash into something that might generate a little more interest. But then again, if we're paying 2.5% on the LOC and we make 4% by investing the cash part, you're only talking about a 1.5% spread. Maybe it isn't worth it.

Thoughts?

 

[RunningBum]

You're going to have to assume some risk to get a 4% return. It may not be that high of risk, but it is something to consider.

 

[RetireBy90]

I like keeping the HELOC, and it would make sense on paper to use it for cash management if you have the discipline to stick to your plan and not let it get out of control. However, lots of exceptions to this. I view it like getting the lowest tax withholding and invest the $$ needed to pay taxes when they come due. While it makes sense on paper, for me in practice it doesn't work. I like the discipline that comes from having proper levels of $$ held out and getting a little back each Apr.

Guess the question you gotta answer to yourself is what am I gonna do when the heloc is at 4% and my cash investments are paying like 1%

Makes sense today, but how to unwind it when or if things flip on you.

 

[67walkon]

It probably doesn't make sense for us. A good bit of our retirement income will come from bond interest payments and dividends, if the government doesn't tax them out of existence. Rather than spend the cash hoard, it might work to use the LOC, paying it back out of the interest payments and dividends. You'd have to be careful not to exceed the inflow in a given year, but it would smooth out the cash flow. But for 1% or so difference, it probably doesn't make sense.

 

[LOL!]

I do not see why cash flow is such a big deal for folks with a retirement portfolio. I just sell equities in my taxable account, then exchange from bond fund to stock fund in my IRA in order to replenish equities.

I rarely have any cash around. Whenever I need more than what's in my checking account, I just convert equities to cash. I don't have to pay taxes on this either since return of capital is tax-free and we have enough carryover losses to last quite a while to offset those gains.

Why have a cash horde when a bond horde or portfolio horde will do just fine?