Dear MarketWatch,
I am 67, still working and will take Social Security in January 2025. My wife, 63, is retired and plans to take Social Security at age 68. At that time, we should collect about $55,000 per year combined from Social Security. Our house is paid for and is worth $1 million.
We also own a vacation rental property valued at $1.4 million with a balance of $375,000 at 2.75% interest rate. The rental used to make money, but with rising expenses and increased competition, we are fortunate to break even. We have no car payments or long-term debt except for the rental mortgage. Together, we have $2.4 million in stocks, mostly after-tax. About $600,000 of my wife’s portfolio is in a Roth IRA.
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Here’s my question — we are looking for income in retirement and would like to learn how to protect our assets. I have a $2 million umbrella policy and good insurance and understand market risk, but I am concerned about outside risk. I’ve been looking at a defined-benefit plan for self-employed individuals and applied for a HELOC, not because I need a loan but for asset protection. Any suggestions?
Protector of the Assets
Dear Protector,
I completely understand wanting to protect your assets, especially as you enter retirement, where you will be relying on them more than ever before.
That said, I’m not sure you’re looking in the right place. A defined benefit plan for self-employed individuals certainly works for retirement benefits, but you’re on the cusp of retirement, so it’s not like you would have too much time to accumulate enough cash. Even if you intend to collect Social Security and still work, how long do you intend to work for and how much money will you be putting toward this pension?
As far as the HELOC, the strategy you’re referring to is known as “equity stripping” where you’re pulling equity out of your home so that there is less for creditors to have access to, should a claim arise. There would, however, still be value in the home that is up for grabs.
If you’re looking to protect your money from creditors, annuities might be an option, if you do your due diligence before selecting one. Retirees use annuities to receive a guaranteed income in retirement, but they can also be used to protect assets from creditors, if that is your concern.
There is no one “right” annuity — some can be tied to the market, usually with the word “variable” in the name, so that wouldn’t necessarily work for you if you’re worried about any market risk. Others are funded either periodically or in one lump sum, requiring you to do a bit of math to make sure you’re getting just what you need from the annuity in the future without leaving yourself with too little to fall back on. You should always have emergency savings, set aside in a separate account that remains untouched.
On that note, be aware of the simplest of protections the government has set out for your money, too. The Securities Investor Protection Corporation, for instance, protects up to $500,000 against loss of stocks, bonds and cash because of a “financially-troubled SIPC-member brokerage firm,” the agency said.
The Federal Deposit Insurance Corporation also has significant protections for accounts — it insures $250,000 per depositor, as you may be aware, but that limit is also per bank as well as the type of account, including individual, joint and, in some cases, IRA. Joint accounts are also protected per depositor, so if you and your wife were on one account, the protection would be up to $500,000.
If you’re just trying to protect your money from the market — who isn’t, right? — then diversification is your friend. That applies to IRAs, non-retirement accounts, money-market accounts and so on; diversify the asset classes your money is held in, including stocks, bonds and cash equivalents; diversify the types of investments within those asset classes, including index, global, various sized-caps and the like; and diversify your taxability, including after- and pre-tax dollars.
A few other things you can do now: get serious about your rental home, and decide if you plan to keep it or sell it. If you’re only breaking even these days, is it worth keeping, or perhaps downsizing the property you own and rent? Also, run the numbers on those Social Security benefits — is there a reason you want to take it while you’re still working? Can you afford to delay, and if so, is there any reason why you wouldn’t? The amount you can collect from Social Security benefits increases each year up until age 70, which could help you in retirement as well as when one spouse dies and the other begins collecting survivor benefits.
If you’re doing it because of longevity concerns, or because you need the money on a monthly basis, that’s completely understandable, but if not, delaying could get you more income that you seek for retirement. Regardless, it never hurts to do a few calculations before making your final decision.
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