Why Plan for Retirement with Only Half Your Assets?
You’ve heard the expression, “It’s the elephant in the room,” when referring to something that is huge but still ignored. That’s true in retirement planning, too, but it’s not the elephant nor the room; it’s the house.
The net worth of retirees over the past three decades has tilted steadily toward housing wealth. A study by the Federal Reserve shows that the share of net worth in primary residences among households headed by people ages 60 to 69 rose from roughly 40% in 1989 to just over 50% by 2022. For those aged 70 to 79, the share climbed from about 38% to 50% over the same period.
A New Approach to Retirement Planning
There are signs that major players see a shift in retirement planning. For example, a Morgan Stanley executive (as reported by Financial Advisor) remarked that as investors live longer, asset managers and insurers must create new vehicles that balance longevity risk with inflation-adjusted returns.
However, while other large organizations are also using terms like longevity risk, they are still ignoring the elephant in the room — housing wealth.
For the past year, we’ve been writing about a solution for Kiplinger visitors that will help retirees age in place with the help of the biggest asset they own. As described here, this solution, which we call HomeEquity2Income (H2I), accesses housing wealth by combining a Home Equity Conversion Mortgage (HECM) with a Qualified Longevity Annuity Contract (QLAC). When you add this solution to a retirement plan, good things happen.
The Benefit of Integrating Housing Wealth
To demonstrate how integration of a retiree’s housing wealth can improve a retirement plan, set out below is a comparison of the “with and without” strategies for a homeowner (male age 67) who has $1 million in IRA savings and $1 million in the value of house. (Our latest article, Treat Home Equity Like Other Investments, demonstrates how H2I would have performed historically for homeowners, considering interest rates and home values over the past 30 years. We’re using those performance numbers in this comparison.)
“Without” — Housing Wealth Outside Plan
Our sample client’s current planning strategy does not take advantage of housing wealth, and leaves the house outside retirement planning.
For this homeowner, here’s how the value of the house would have appreciated and depreciated over the past 28 years ending June 30, 2025.
The plan with only investments generates no additional income or liquid savings from the housing wealth, and leaves only the value of the home at passing. Question: Could the homeowner manage to meet both housing costs and, say, long-term care expenses without downsizing? Note that the downsizing cost could be several hundred thousand dollars.
“With” — HomeEquity2Income (H2I) Brings More Income and Liquid Savings
Contrast the results above to the retiree who used the H2I planning strategy to generate more income and liquid savings.
- Unlock housing wealth with HECM
- Deliver an immediate $330,000 line of credit
- Take modest tax-free HECM drawdowns until age 84
- Use $200,000 from IRA Account to purchase QLAC and a ladder of
lifetime income
- Use a portion of income for budgeted expenses as inflation hedge
- Use the rest of income to pay down HECM loan balance starting at age 85
Note: Example is for male, 67, starting in 1996. Based on current annuity pricing and average historical interest rates and property growth rates. Assumes $1 million value of house and $200,000 from IRA savings to purchase QLAC.
Greater Security from H2I Enables Higher Allocation of Portfolio to Stocks
Without the income and liquidity from a HECM-QLAC combination, the allocation to stocks in the “without” strategy will be conservative and follow the usual model of 100 minus age, or an allocation of 30% (rounded) to stocks. So, the “without” plan is to invest $1 million in a portfolio of stocks and bonds and allocate $300,000 to stocks and $700,000 to fixed income.
With the income and liquid savings from HECM/QLAC, however, the allocation to stocks can be slightly more aggressive. In our example, it’s 65% of the investment portfolio to stocks. So, the “with” plan is to invest $800,000 from the IRA, split between a balanced investment portfolio and an immediate annuity as follows:
- $640,000 to portfolio, with $416,000 (65%) to stocks and $224,000 (35%) to fixed income
- $160,000 to immediate annuity
Here is a graph of the total income, together with liquid savings and legacy for what we call the IRA4Income plan.
Advantages over Investment Only Traditional Planning
Set out below is a comparison of the results for the “with and without” retirement plans, assuming standard returns of 8% for equities and 5% for fixed income, and adverse returns of 4% for both equities and fixed income.
As you can see, this homeowner builds more income (around $700,000) and liquidity (over $1.3 million) from his IRA4Income plan. With the liquid savings, he should be able to pay for long-term health care if needed. If he stays healthy, he can spend the additional income or reinvest it.
Use Favorable Economics to Meet Other Objectives
While the starting point for evaluating IRA4Income is the increase in income and liquid savings, there are individuals who can use other sources of income, e.g., interest and dividends, Social Security, pensions and other annuities, to meet additional objectives.
A possible objective for them might be to maximize the legacy left to children, grandchildren, or a favorite charity. One way to accomplish this is by taking advantage of a Roth conversion, where Rollover IRA funds are transferred to a Roth IRA. A tax is paid at the time of conversion but taxes are eliminated on the future growth of the Roth account.
Here’s a way to accomplish this with IRA4Income:
- Elect a lower income target (e.g., 5.0% instead of 6.5%).
- Reduce Rollover IRA amount to $775,000, leaving $225,000 for Roth conversion.
- Pay taxes on conversion using Roth funds or other income.
- Grow the Roth tax-free in a balanced portfolio.
- Rollover IRA + Roth AUM at age 90: Over $1.5 million.
Set out below is a projection of the combined balance of the Rollover and Roth IRA, approaching $1.5 million at our investor’s passing at age 90 — or more than six times the original Roth conversion of $225,000.
In addition, the ongoing tax benefits of this strategy are significant, with about half the RMD from the Rollover IRA Account.
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Build a plan that finds the most income, legacy, and liquidity
Input your numbers here and find out how H2I might work. We think you will find that an IRA4Income HomeEquity2Income plan built on needs and resources can provide more income, legacy, and liquidity than keeping the house outside the retirement plan and then being forced to sell the home to pay for higher living costs or unplanned expenses. It helps protect the consumer while leaving heirs with a substantial financial legacy.
