Home Equity Can Give You Choices for Retirement When the Stock Market Goes Crazy
The stock market may have seen historic gains and ongoing rallies following the recession, but it’s still never a sure thing—especially when it comes to investing for retirement.
Stocks can be up one day and down the next.
The problem isn’t that dips, dives and swings existing in financial markets. The problem for people approaching retirement is the timing of these ups and downs.
If you’re in the beginning of your investing career, market swings don’t matter a whole lot. But if you are approaching retirement, or if you have retired already, market swings can make—or break—your financial future.
Timing is Everything
Researchers who recently spoke with the Wall Street Journal call the effects of timing on your retirement investment portfolios “sequence risk.” This essentially means that the order in which stock values rise and fall can make a big difference to a retirement portfolio.
If you plan on having more and more money to invest in the stock market — like you do when you are young — then you actually want stock prices to fall or stay low.
If you need to be taking money out of the stock market, then you want prices to go higher.
But you can not control the timing of price dips and increases.
It is Good to Have an Array of Financial Options
The years between ages 55 to 75 tend to be most subject to this sequence risk, Peter Chiappinelli, an asset-allocation strategist at Boston-based investment firm GMO recently told the WSJ.
And there are some ways to manage the risk and make sure it doesn’t derail your fiancial plans.
Any good financial planner knows that diversification is important to financial security. The more different kinds of investments you have, the better off you will be.
Think of what you do when you are thirsty and want a glass of milk. If you are out of milk, you can drink orange juice. If orange juice is running low and you want to save it for breakfast, you might choose water.
It is good to have choices.
The same is true of your finances. If the stock market is healthy, you might want to withdraw funds from there for retirement. If your stocks are low, it might be better if you had other kinds of assets to draw from.
4 Strategies for Your Retirement Finances that Work During Stock Market Swings
GMO has found a few investment strategies that are effective. These include:
- Reducing exposure to stocks in general during times of “investing euphoria.”
- Holding cash and other very conservative invesment vehicles such as treasury inflations protected securities are other options.
- Delaying your Social Security withdrawal plans hedges against risks taken in the stock market, if you can afford to delay long enough to boost your monthly benefit.
- Getting a reverse mortgage line of credit
Why the Reverse Mortgage is a Good Strategy for Protecting Finances from Stock Market Swings
Wade Pfau, a professor at American College of Financial Services in Bryn Mawr, Pa., told the WSJ that taking out a reverse mortgage as a line of credit is a good way to protect the money you have in the stock markets.
The idea behind a reverse mortgage line of credit to protect from market volatility is that you only use it when you need it.
“This way, you reserve the right to borrow against your home at reasonably competitive rates,” the WSJ writes. “But you would draw on the money only at times when you would otherwise have to lock in losses on your stock portfolio.”
A reverse mortgage can be used to access your home equity in the form of cash flow via a government-insured loan. Many people are familiar with reverse mortgage commercials that tout the benefits of a lump-sum reverse mortgage, or a term or tenure payment plan that allows the borrower to receive monthly payments from his or her home equity.
(Remember that a reverse mortgage is a loan, and it accrues interest over time that will need to be paid back when the borrower passes away or moves from the home.)
But a lesser known option, and one that is utilized by most reverse mortgage borrowers today, is the option to take a reverse mortgage as a line of credit.
Unlike traditional home equity lines of credit or other home loans that allow borrowers to access their home equity, the reverse mortgage line of credit cannot be frozen by the lender, and it’s guaranteed under the Federal Housing Administration’s insurance fund. It also grows over time if you leave it untouched; making it a viable option for those who have not yet retired, but plan to do so in the coming years.
If you’re interested in how a reverse mortgage can help you withstand a volatile market environment, contact a reverse mortgage expert to learn more.