Author Topic: Using HELOC to Pay Living Expenses During FIRE  (Read 3219 times)

Gimesalot

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Using HELOC to Pay Living Expenses During FIRE
« on: February 07, 2017, 04:28:29 PM »
I am getting ready to pull the plug next year so I am going through the pre-fire checklist.  I saw that there is a tip about getting a HELOC.  That got me thinking... Would it make sense to pay for our living expenses with money from a HELOC during market downturns?  Obviously, there is no such thing as a free lunch, so there is some risk involved.    Thoughts?

Viking Thor

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Re: Using HELOC to Pay Living Expenses During FIRE
« Reply #1 on: February 07, 2017, 09:08:55 PM »
in my opinion not a good idea, better to have some portion of net worth in cash, CDs, bonds, that are less likely to take hit in downturn.

if you are 100% stocks and then use HELOC when market goes down, now you have additional debt to pay back. Then what if the market keeps goi g down? Then you are liquidating lots of stock every month at low point to pay living costs plus HELOC debt.

Having a HELOC is fine, but wouldn't want to pay living expemses from that.

El Marinero

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Re: Using HELOC to Pay Living Expenses During FIRE
« Reply #2 on: February 09, 2017, 11:16:44 AM »
Would it make sense to pay for our living expenses with money from a HELOC during market downturns? 

What you are suggesting is market timing.  How good is your crystal ball?

Full disclosure:  I do have an unused HELOC, and knowing I have access to liquidity quickly is a warm fuzzy feeling. 
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Gimesalot

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Re: Using HELOC to Pay Living Expenses During FIRE
« Reply #3 on: February 09, 2017, 01:57:23 PM »
I don't think it is market timing in the true sense of the word because using the HELOC is based on PAST performance.

Here's my idea to give an example:
Begining Stache: $600k
Yearly Budget during FIRE: $24k
Withdrawls per year: 2
Retirement: 01/01/2007
HELOC Limit: $75k
Market performance is accurate, HELOC rates are best google could find

01/01/2007: Withdraw $12k from markets
Market goes up 6.12%
Stache: $624k

06/30/2007: Withdraw $12k from markets
Market goes down 2.33%
Stache: $597k

01/01/2008: Withdraw $12k from markets
Market goes down 11.55%
Stache: $518k

06/30/2008: Withdraw $12k from markets
Market goes down 32.42%
Stache: $342k

01/01/2009: Borrow $12.7k from HELOC @ 3.25% (extra money to account for HELOC payments)
Market is down 1.34%
Stache: $337k

06/30/2009: Borrow $13.4k from HELOC @ 3.25%
Market is up 21.18%
Stache: $409k

1/1/2010:  Borrow $14.1k from HELOC @ 3.25%
Market is down 7.57%
Stache: $378k

7/1/2010:  Borrow $14.8k from HELOC @ 3.25%
Market is up 22.02%
Stache: $461k

1/1/2011:  Withdraw $14.8k from markets
Market is up 5.01%
Stache: $468k

7/1/2011:  Withdraw $14.8k from markets
Market is down 4.77%
Stache: $431k

So on and so forth...

I am going to run a more detailed analysis in Excel to get better numbers.

Viking Thor

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Re: Using HELOC to Pay Living Expenses During FIRE
« Reply #4 on: February 09, 2017, 07:09:33 PM »
No guarantee past performance will equal future, so not sure how looking at a specific past time period would help. Also the HELOC line available could be reduced or interest rate rise, at worst possible time.

Sure it could work out or even perform better than a conventional approach but you would be increasing risk.

Instead of having a portion of portfolio in bonds, cds, or cash to reduce risk, this would be investing in stocks with borrowed money. It may yield a better result on average over time  but with way higher variability and greater chance of worst outcome. Reducing that variability is why people invest in assets other than stocks.

Retire-Canada

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Re: Using HELOC to Pay Living Expenses During FIRE
« Reply #5 on: February 20, 2017, 04:57:56 PM »
That got me thinking... Would it make sense to pay for our living expenses with money from a HELOC during market downturns? 

That makes sense. I have a $30K LOC [not home equity based] that is my emergency fund I could live off of for a year. There is really no significant downside as long as your interest rate is reasonable you have a large investment portfolio to draw on if needed.

Dicey

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Re: Using HELOC to Pay Living Expenses During FIRE
« Reply #6 on: March 04, 2017, 11:48:58 PM »
That got me thinking... Would it make sense to pay for our living expenses with money from a HELOC during market downturns? 

That makes sense. I have a $30K LOC [not home equity based] that is my emergency fund I could live off of for a year. There is really no significant downside as long as your interest rate is reasonable you have a large investment portfolio to draw on if needed.
I think I agree with R-C, provided that you have the self-discipline not to go crazy with the "found" money.

^ This. I got a small HELOC just before I FIREd "just in case" but never drew on it. Had cash (laddered CDs) and some taxable accountsI used to cover the first few years of FIRE expenses instead. Get a HELOC for an EF but not for an expense fund.

ETA: there's a recent thread around here somewhere talking about HELOCs that were closed/cancelled when the recession hit and banks collapsed/were bought out and  housing prices fell by 50% in some places. Left lots of people with big HELOC repayment debts and no more access to those funds.
Yeah, there's a lot of skepticism on that thread, but it really did happen to lots of people, so something to consider.
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TomTX

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Re: Using HELOC to Pay Living Expenses During FIRE
« Reply #7 on: March 06, 2017, 05:16:47 AM »
No guarantee past performance will equal future, so not sure how looking at a specific past time period would help. Also the HELOC line available could be reduced or interest rate rise, at worst possible time.

Sure it could work out or even perform better than a conventional approach but you would be increasing risk.

Instead of having a portion of portfolio in bonds, cds, or cash to reduce risk, this would be investing in stocks with borrowed money. It may yield a better result on average over time  but with way higher variability and greater chance of worst outcome. Reducing that variability is why people invest in assets other than stocks.

Actually - no, its not riskier. Might seem counterintuitive, but frequently the calculators say that for a long retirement, going to 100% stocks may actually reduce the chance of portfolio failure slightly. The longer the timeframe, the riskier it is to have bonds - because (on average) they yield less than stocks.

Sure, HELOCs were closed or reduced. Really, that's NBD. It will probably take some work, but there were ALWAYS banks/credit unions willing to give out a HEL/HELOC, even in the worst of the times after the housing bubble. Go open another one.

Or sell stuff on Craigslist.

Or get a part time job.

Or do some other side-gig for income.

Or (heresy!) live on a low-interest credit card for a year.

It's one of many potential options to avoid selling stocks when they are 50% down and shouldn't be rejected because of a kneejerk Dave Ramsey reaction of "debt is BAD!" - debt is a tool. Uncontrolled debt is bad. Properly used, debt could prevent that early-years failure of your portfolio.

Arktinkerer

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Re: Using HELOC to Pay Living Expenses During FIRE
« Reply #8 on: April 02, 2017, 12:35:34 PM »
Slightly different case--I got a good size payment from some consulting work.  Putting those funds away in a Solo401K and taking a HELOC may make sense from a tax standpoint.  Depending on expenditures that can be counted as business related I may be able to take deduction on the HELOC interest and some depreciation.  Putting the incoming cash away in the Solo401K takes it off the table for taxes.  The savings will more than pay the interest on the HELOC.

Viking Thor

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Re: Using HELOC to Pay Living Expenses During FIRE
« Reply #9 on: April 02, 2017, 03:24:53 PM »
No guarantee past performance will equal future, so not sure how looking at a specific past time period would help. Also the HELOC line available could be reduced or interest rate rise, at worst possible time.

Sure it could work out or even perform better than a conventional approach but you would be increasing risk.

Instead of having a portion of portfolio in bonds, cds, or cash to reduce risk, this would be investing in stocks with borrowed money. It may yield a better result on average over time  but with way higher variability and greater chance of worst outcome. Reducing that variability is why people invest in assets other than stocks.

Actually - no, its not riskier. Might seem counterintuitive, but frequently the calculators say that for a long retirement, going to 100% stocks may actually reduce the chance of portfolio failure slightly. The longer the timeframe, the riskier it is to have bonds - because (on average) they yield less than stocks.

Sure, HELOCs were closed or reduced. Really, that's NBD. It will probably take some work, but there were ALWAYS banks/credit unions willing to give out a HEL/HELOC, even in the worst of the times after the housing bubble. Go open another one.

Or sell stuff on Craigslist.

Or get a part time job.

Or do some other side-gig for income.

Or (heresy!) live on a low-interest credit card for a year.

It's one of many potential options to avoid selling stocks when they are 50% down and shouldn't be rejected because of a kneejerk Dave Ramsey reaction of "debt is BAD!" - debt is a tool. Uncontrolled debt is bad. Properly used, debt could prevent that early-years failure of your portfolio.

I didn't say anything against having debt or access to a HELOC. The question was whether to plan on using a HELOC for living expensesduring market downturns. If your plan is to use it for living expenses during downturns, that means leverage. Leverage = risk, otherwise everyone would be more than 100% in stocks (net worth other than basic savings account fully in stock plus leveraged with loans). The more conventional approach is to have a portion of net worth in some other asset class so that when stocks get crushed you can use bonds for example  to pay living expenses. I am actually a very aggressive investor with 90% of investments in stock but I know there is risk and increased volatility with this approach.

HenryDavid

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Re: Using HELOC to Pay Living Expenses During FIRE
« Reply #10 on: April 13, 2017, 07:46:09 AM »
Money is imaginary.
The "money" with a minus-sign in front of it, which is what your HELOC withdrawal is, or an overdraft would be, is legal tender.
As long as there's a foreseeable way to balance out the minus sign with plus sign _over a reasonable time-frame_, it's all good.

I enjoyed an immensely valuable unpaid leave from a job once, living on overdraft funds and a small part-time job--because I knew I had a decent salary waiting at the end. The overdraft evaporated fast and the plus-signs returned quickly, but the experiences gained . . . priceless.

Colleagues thought this year's leave was possible because I was "independently wealthy." (People said this.) No, I was debt free and flexible.

So for a limited time-frame, with careful forethought, what the hell?
This is how businesses work all day long. You do have to keep track of course . . . .
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TomTX

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Re: Using HELOC to Pay Living Expenses During FIRE
« Reply #11 on: April 13, 2017, 09:00:35 PM »
No guarantee past performance will equal future, so not sure how looking at a specific past time period would help. Also the HELOC line available could be reduced or interest rate rise, at worst possible time.

Sure it could work out or even perform better than a conventional approach but you would be increasing risk.

Instead of having a portion of portfolio in bonds, cds, or cash to reduce risk, this would be investing in stocks with borrowed money. It may yield a better result on average over time  but with way higher variability and greater chance of worst outcome. Reducing that variability is why people invest in assets other than stocks.

Actually - no, its not riskier. Might seem counterintuitive, but frequently the calculators say that for a long retirement, going to 100% stocks may actually reduce the chance of portfolio failure slightly. The longer the timeframe, the riskier it is to have bonds - because (on average) they yield less than stocks.

Sure, HELOCs were closed or reduced. Really, that's NBD. It will probably take some work, but there were ALWAYS banks/credit unions willing to give out a HEL/HELOC, even in the worst of the times after the housing bubble. Go open another one.

Or sell stuff on Craigslist.

Or get a part time job.

Or do some other side-gig for income.

Or (heresy!) live on a low-interest credit card for a year.

It's one of many potential options to avoid selling stocks when they are 50% down and shouldn't be rejected because of a kneejerk Dave Ramsey reaction of "debt is BAD!" - debt is a tool. Uncontrolled debt is bad. Properly used, debt could prevent that early-years failure of your portfolio.

I didn't say anything against having debt or access to a HELOC. The question was whether to plan on using a HELOC for living expensesduring market downturns. If your plan is to use it for living expenses during downturns, that means leverage. Leverage = risk, otherwise everyone would be more than 100% in stocks (net worth other than basic savings account fully in stock plus leveraged with loans). The more conventional approach is to have a portion of net worth in some other asset class so that when stocks get crushed you can use bonds for example  to pay living expenses. I am actually a very aggressive investor with 90% of investments in stock but I know there is risk and increased volatility with this approach.

...but I do have a portion of my net worth in some other asset class. Real Estate. My house. When stocks get crushed, use a HELOC (if available).

Moustaches

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Re: Using HELOC to Pay Living Expenses During FIRE
« Reply #12 on: April 14, 2017, 12:06:03 PM »
No, BONDS.  When the stock market crashes, bonds go up as the Federal Reserve prints money.  Then you can withdraw the bonds at higher values than you had before, locking in good returns, and bringing your desired target back to normal.  When the market recovers you can replenish your bonds with overpriced stocks.  You don't need 100% stocks to retire early, that's just crazytown in my opinion.
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EdwardMM

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Re: Using HELOC to Pay Living Expenses During FIRE
« Reply #13 on: April 14, 2017, 10:13:43 PM »
No, BONDS.  When the stock market crashes, bonds go up as the Federal Reserve prints money.  Then you can withdraw the bonds at higher values than you had before, locking in good returns, and bringing your desired target back to normal.  When the market recovers you can replenish your bonds with overpriced stocks.  You don't need 100% stocks to retire early, that's just crazytown in my opinion.

I'm not sure this is correct. It depends on what specific bond funds you own, what yields they have, etc.  Buying bonds right now is a tough situation. Interest rates have been so low it's going to be hard to get a return on bonds if the market tanks. The Fed doesn't have much space to lower rates, so the "big boost" you could get from bonds that would exist if the overnight rate were, say, 4.5% and then was quickly dropped to 0.5% won't really happen. At least that's my take right now. As interest rates rise, and companies have to pay more to borrow, at that point you're going to get some good returns. I would wait to move into bonds until the Fed juices the rates a bit more. The economy is humming right now, and the Fed is going to want to put on the brakes soon. When it gets to maximum overnight rate, I believe that's when you want to be buying bonds - just in time for a market downturn, the fed to cut rates, and your bond funds to do... nicely.

Am I thinking about that wrong?

Retire-Canada

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Re: Using HELOC to Pay Living Expenses During FIRE
« Reply #14 on: April 15, 2017, 06:52:44 AM »
No, BONDS.  When the stock market crashes, bonds go up as the Federal Reserve prints money.  Then you can withdraw the bonds at higher values than you had before, locking in good returns, and bringing your desired target back to normal.  When the market recovers you can replenish your bonds with overpriced stocks.  You don't need 100% stocks to retire early, that's just crazytown in my opinion.

Bonds are a tool. You should hold them or not hold them because you have looked at your personal situation and determined you need what they bring to your portfolio or you don't. I'm 100% stocks at the moment pre-FIRE I can't see any need for them while I am accumulating. As I am about to FIRE I will convert a few years of living expenses from stocks to bonds to protect against a poor early sequence of returns risk, but I won't allow that dollar value to grow.