A Planned Trade Down is a financial planning strategy typically used by a homeowner with significant equity looking to improve their cashflow. Maybe they are nearing retirement and are just a bit short on their finances or they need to make up some lost ground – however, they have this great asset, their home.
Goals typically are:

• To increase retirement income
• Diversify assets
• Protect assets
• Increase the estate and the net worth

Meet John and Sarah Patterson. There ages are 65 and 62. They have a home worth about $1.2 million. The mortgage is about $200,000 with a 15-year payment of about $1,400. They have almost $200,000 in various accounts. Total asset value is $1.4 million. Their Income is from assets, company pension, and Social Security. Total expenses are $2,600 a month and coming in is $5,600 a month for a net positive of $2,980 a month – to live their lives on. Please do not get stuck in all the numbers or minutia – the important thing is to understand the concept.

What could they do? 1)  They could sell the $1.2 million home and buy a $600,000 home using a forward mortgage. In this case, a $400,000 interest only mortgage. Their home is worth $600,000, they have a $400,000 mortgage, with a payment of $1,500, which frees up quite a bit of cash flow. Their taxes and insurance are lower and could be even lower if they use Proposition 60 and 90 (to carry over their tax base if lower). They have diversified their assets. Their illiquid equity is now diversified into different assets.

One unique thing here is the fact that they buy universal life insurance to create an asset for their family and kids. They also buy long-term care, which is a health insurance gap for a lot of people. This strategy provides a way to pay for long-term care insurance and increase the estate value while generating additional income. Same level of assets, at $1,400,000. Expenses have gone up to $3,629, but the income has also gone up quite a bit. They have the same pension and social security income, but are getting additional income off their assets, about $7,900 a month – with a net income of $4,264!

In Summary:

• Freed up about $600,000 – $500,000 was tax-free.
• income was increased by $1,284 bucks a month.
• Diversified their savings into additional funds.
• Set up life insurance for their kids.
• Protected themselves with long-term care insurance.

Retirement Strategy Summarized       

Planned Trade Down – A Strategic way to Improve Cash Flow and Lifestyle!

• Free up dormant Equity
• Increase Liquid Assets
• Increase Income
• Protect your family

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