Author Topic: Using HELOC to Pay Living Expenses During FIRE  (Read 1516 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.

spartana

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Re: Using HELOC to Pay Living Expenses During FIRE
« Reply #2 on: February 08, 2017, 12:07:35 AM »
^ 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.
« Last Edit: February 08, 2017, 12:12:32 AM by spartana »
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El Marinero

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Re: Using HELOC to Pay Living Expenses During FIRE
« Reply #3 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 #4 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 #5 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 #6 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 #7 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 #8 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.