Getting a HELOC before Retiring

[ERD50]

Originally Posted by RetiredAt49 View Post
Your first three words might sum it up best (just kidding). However, what exactly is there to explain?

To cover our expenses, we could have done the following:
1) Sell equities while their prices are falling. Pretty obvious why that’s not ideal.
2) Leverage a no-interest, minimum payment, 18-month credit card + HELOC during a bear market and only sell minimal equities (actually dividends covered it) until the market improved.

Again, Firecalc and others show a 100% success rate (using option 1) but using other financial vehicles (especially during a bear market) can help protect a nest egg and reduce SORR. YMMV

Your situation doesn’t necessarily translate to a good strategy for others. You got lucky with timing. Taking on debt to cover expenses in a falling market? Double whammy.

What's the problem? Where's the 'whammy' (let alone 'double-whammy')?

He avoided cap gains tax with the HELOC, he said "dividends covered it (the payments to the HELOC)". So what's the problem? What's luck got to do with it?

-ERD50

 

[Time2]

18 months with zero interest is good anytime you borrow.
The key is, when is a good time to borrow, and what is a good thing to borrow for.

 

[LateToFIRE]

What's the problem? Where's the 'whammy' (let alone 'double-whammy')?

He avoided cap gains tax with the HELOC, he said "dividends covered it (the payments to the HELOC)". So what's the problem? What's luck got to do with it?

-ERD50

Though worked in this example, I can see a number of potential issues with using HELOC and credit card debt to bridge market volatility.

First of all, I don't think Retiredat49 was avoiding cap gains tax, only delaying sale of stock until the market improved - effectively timing the market. If the market downturn had been an extended one, this strategy might not have worked so well - could have simply extended the time to sell to a period of greater losses, further deepened by the cost of borrowing. In our current higher rate environment, doubtful this would work again as effectively.

Lastly, at risk of sounding like a broken record, HELOC's and CC's are not committed credit lines. They can be revoked at any time for mysterious reasons - caveat is that drawn amounts on a cancelled HELOC would be termed-out on a pre-determined schedule.

 

[lauradrops]

We always keep an open line of credit on the house. Have never used it, but had it in case. This last one we took a few years ago has a 2.99% fixed rate. We did take it in retirement, but we also have 100% equity in the house. It costs us nothing unless we draw on it.

 

[LateToFIRE]

For the record, I am hardly one those "all debt is bad" types. I think debt can be used as an extremely valuable tool in wealth building. Access to "other people's money" is one of the ways the rich manage to get even richer. There is no way I would have been able to create a multi-$mm portfolio of r.e. without the prodigious use of debt capital. But, generally speaking, debt is a bit like fire - it can keep you warm & cozy - but it can kill yah too. I wouldn't want to rely on access to debt in a crunch - Murphy's Law dictates that there is a chance it either won't be readily available or it will be rather expensive.

 

[EastWest Gal]

We got a HELOC just before I retired in 2014, but there were 5 OMYs after that. Nevertheless, we used it to replace the deck, new hot tub and add solar, then got a tax rebate for the solar. in 2020 we replaced our crumbling driveway and portions of the sidewalk. It needs to be paid off by 2044, when we are 84 and 85. We are making payments that more than cover the interest and will pay it off in 2-3 years, or sooner. There is not enough debt to be a problem.

 

[jazz4cash]

I took a HELOC with variable rate which is typical but the rate jumped to 7.75. That’s pricey but still comparable to some new 1st mortgages. We were planning a major home improvement but never got a round to it.

 

[ERD50]

Originally Posted by ERD50 View Post
What's the problem? Where's the 'whammy' (let alone 'double-whammy')?

He avoided cap gains tax with the HELOC, he said "dividends covered it (the payments to the HELOC)". So what's the problem? What's luck got to do with it?

-ERD50

Though worked in this example, I can see a number of potential issues with using HELOC and credit card debt to bridge market volatility.

First of all, I don't think Retiredat49 was avoiding cap gains tax, only delaying sale of stock until the market improved - effectively timing the market. ...

That assumption does not seem to be supported by the comment that the divs were sufficient to pay it off.

I have cap gains that I most likely will never pay tax on, they will be part of what is passed on to heirs/charity.

.... In our current higher rate environment, doubtful this would work again as effectively. ...

But he's not doing it now, he did it (as did I), when it appeared advantageous.

.... Lastly, at risk of sounding like a broken record, HELOC's and CC's are not committed credit lines. They can be revoked at any time for mysterious reasons - caveat is that drawn amounts on a cancelled HELOC would be termed-out on a pre-determined schedule.

True for a HELOC and CC (though not too likely), but then he's only worse off if the market was down at that time (which I guess would probably be in sink with credit being pulled), but even so, it could work out, depending.

I didn't use a HELOC, I took a loan against my stocks (it was called a LOC, not 'margin'), and it worked for me as I was able to offer cash in a competitive market, and later got a 3.25% mortgage, locked for 30 years. Never had to sell any stock, no cap gains taxes, and the LOC rate was close to mortgage rates anyhow.

It certainly depends on circumstances, but I wouldn't poo-poo it with a broad brush.

-ERD50

 

[Montecfo]

We always keep an open line of credit on the house. Have never used it, but had it in case. This last one we took a few years ago has a 2.99% fixed rate. We did take it in retirement, but we also have 100% equity in the house. It costs us nothing unless we draw on it.

Wise. Good tool to have.

 

[LateToFIRE]

That assumption does not seem to be supported by the comment that the divs were sufficient to pay it off.

I have cap gains that I most likely will never pay tax on, they will be part of what is passed on to heirs/charity.



But he's not doing it now, he did it (as did I), when it appeared advantageous.



True for a HELOC and CC (though not too likely), but then he's only worse off if the market was down at that time (which I guess would probably be in sink with credit being pulled), but even so, it could work out, depending.

I didn't use a HELOC, I took a loan against my stocks (it was called a LOC, not 'margin'), and it worked for me as I was able to offer cash in a competitive market, and later got a 3.25% mortgage, locked for 30 years. Never had to sell any stock, no cap gains taxes, and the LOC rate was close to mortgage rates anyhow.

It certainly depends on circumstances, but I wouldn't poo-poo it with a broad brush.

-ERD50

I wasn't debating whether or not the loan idea worked in the past - that's old news - totally irrelevant. Only that I could see some potential issues with someone relying on credit availability that is not funds certain and variable in rate - that's not a broad brush. Just citing some of the risks. For sure if you have the considerable assets such that you don't really "need" the debt, only playing some kind of arbitrage, then have at it, no major downsides if it's just play money.

 

[old medic]

18 months with zero interest is good anytime you borrow. The key is, when is a good time to borrow, and what is a good thing to borrow for.

How about 0% interest over the past 4 years to build a house? We have 0 mortgage and during this massive remodel balance's have ranged from 0-$8000. Several store cards at 0% if paid off by this time. A few 6 or 12 months equal payments 0%. Have paid transfer fees twice in that time, maybe $150. This frees up our extra money to put into savings to pay for other stuff we can't get under 0% offers.
The Personal Line of Credit is nice to have, and did pull some out to have a buffer with some large expenses coming up, and half paid back already in 3 months.
Still planning on looking into a HELOC once the house is done.

 

[ERD50]

.... Only that I could see some potential issues with someone relying on credit availability that is not funds certain and variable in rate ... Just citing some of the risks. ....

I agree on those points. -ERD50