Retirement Planning Strategies: Balancing Income, Taxes, and Home Equity

Retirement is often less about hitting a magic savings number and more about balancing income sources, expenses, and taxes in a way that sustains your lifestyle. For many retirees, Social Security and pensions form the foundation, while savings and home equity provide additional flexibility. Let’s explore real-world retirement planning strategies through examples of couples and individuals preparing for their next chapter.

A 65-Year-Old Couple Planning Retirement

This couple needs about $65,000 annually for expenses but currently spends closer to $90,000. Their income sources include $46,000 from Social Security and $21,000 from a pension, totaling $67,000 just above their target. With nearly $250,000 in savings $200,000 in a brokerage account and $25,000 in a 401(k) their plan looks sustainable.

While they have concerns about inflation eroding Social Security benefits, their guaranteed income already covers core expenses. Their brokerage savings can serve as a buffer for travel, healthcare, and inflation surprises, giving them confidence as they step into retirement.

A 60-Year-Old Retiree and Withdrawal Strategy

Another case highlights a 60-year-old retiree with $1.5 million in pretax accounts and a home equity line of credit (HELOC) of $378,000 at 7%. Their annual need is $100,000, placing them in the 30% tax bracket.

Here are two strategies they’re weighing:

• HELOC withdrawals: Borrowing $100,000 would cost about $4,900 in interest, but none of it is taxable, keeping their taxable income under $100,000.
• Pretax account withdrawals: They would need to withdraw about $130,000 to net $100,000 after taxes, raising their taxable income and overall tax burden.

Mathematically, the HELOC looks attractive but the risk lies in variable interest rates that could increase dramatically in the future. The key is not just running the numbers but stress-testing the plan against rising rates and changing market conditions.

The Role of Tax Strategy in Retirement

Taxes don’t end when work does and managing them well can make savings last longer. One strategy involves using pretax dollars to cover taxes on Roth conversions. For example, if you generate $100,000 of extra income, you might convert $75,000 into a Roth IRA and set aside $25,000 for taxes. This keeps future withdrawals tax-free, reduces Required Minimum Distributions (RMDs), and increases long-term flexibility.

Meeting Retirement Income Needs

A typical retiree at age 67 may require $70,000 annually to maintain lifestyle. If Social Security provides $45,000, the remaining $25,000 to $30,000 must come from savings. For someone with a $1.5 million portfolio, this withdrawal level falls within a sustainable range but leaves little margin for error.

Using Home Equity as a Retirement Tool

For retirees with significant home equity, options like a reverse mortgage (HECM) can provide a financial cushion. Unlike a HELOC, a reverse mortgage doesn’t require immediate repayment. It offers a line of credit that grows over time and can be tapped when needed, all while allowing the retiree to remain in their home.

Final Thoughts

Retirement planning isn’t one-size-fits-all. Some retirees thrive with guaranteed income and modest savings, while others leverage complex tax and home equity strategies to optimize their wealth. The key is aligning expenses, income streams, and tax planning to create a retirement that’s not only sustainable but also fulfilling.

Intended for educational purposes only. Opinions expressed are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Neither the information presented, nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Consult your financial professional before making any investment decisions. Opinions expressed are subject to change without notice.

IMPORTANT DISCLOSURES:

• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC. A Registered Investment Advisor.

• Pure Financial Advisors, LLC. does not offer tax or legal advice. Consult with a tax advisor or attorney regarding specific situations.

• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.

• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.