How to navigate financial liquidity in retirement.

You may be approaching retirement — or you might already be there. For many, this may mean leaving your income stream generated through employment for the Social Security, pension and retirement investment income you’ve been working toward. But just because your traditional W2 income may be coming to an end doesn’t mean you’re your need for cash flow ends — especially when it comes to unexpected events. So if you need a line of credit or other similar financial tool and no longer have a traditional W2 to demonstrate your income, do you still have options? There are many things to factor in when considering your funds in the later years of your life.

First, understand your credit.

Your credit is gold — and understanding the criteria that banks use to evaluate applications is crucial. Among the various factors considered, the type of income, whether it’s investment interest income or W2 income, plays a significant role.

If you’re thinking of getting rid of that old credit card you paid off — don’t be too hasty. Many people don’t understand that their longest credit line is sometimes a great asset. Keeping it open can positively impact your credit score, and maintaining the history of the credit line can improve your credit utilization ratio. By retaining the card, you can demonstrate that you have a stable and responsible credit behavior, and it can work to your advantage if you’re looking for new credit opportunities.

Consider your debt-to-income (DTI) ratio.

One thing many people overlook is their overall debt-to-income ratio. This measures your monthly debt payments relative to your income. It can also be your best friend if you’re looking to secure a new loan.

Lenders use the DTI ratio to determine how well you manage monthly obligations and whether you can afford to take on additional debt. A lower DTI ratio indicates a healthy balance between debt and income, while a higher DTI ratio suggests you might be over-leveraged and at greater risk of default.

Understanding and managing your DTI ratio is a crucial aspect of maintaining financial health and securing favorable terms when applying for credit. By keeping an eye on this ratio, you can better navigate your financial situation and make more informed decisions.

How to improve your DTI ratio

• Increase income: Taking on a part-time job, freelancing, or finding ways to increase your primary income can help improve your DTI ratio.
• Reduce debt: Pay down existing debts, starting with high-interest accounts to reduce your monthly obligations.
• Avoid new debts: Limit taking on new debt until your DTI ratio improves.

Investment interest income can be used for a line of credit.

When considering a line of credit, you have to take into consideration your income — hint: banks will as well. If you don’t have traditional income anymore, such as a W2, you may be able to provide copies of statements such as IRAs, 401(k)s, Social Security income or more. Your financial advisor may be able to help. Your lender will evaluate what other outstanding financial obligations you have, as well as your debt-to-income (DTI) ratio.

The type of income you present can significantly impact the approval process and the terms offered by lenders. Investment income is the income earned from interest on investments such as bonds, savings accounts and other interest-bearing financial instruments. It can be variable and depends on the performance of the invested assets, and it can offer several unique advantages for credit line applications. Higher income from investments can enhance your overall financial profile, making you a more attractive candidate for a credit line.

It also can showcase stability. While investments can fluctuate, certain types of investment interest income, like those from fixed-income securities (e.g., bonds), can offer stable and predictable returns. Lenders appreciate predictability, and having a reliable stream of investment income can demonstrate financial stability, which is a key factor in credit assessments.

It's also a good idea to try and diversify your income sources. This diversification reduces the risk perceived by lenders since you’re not solely reliant on a single source of income.

Commerce is here to help.

Whether you’re planning to purchase a larger ticket item or just wanting to make sure you’ll have liquidity in place for unexpected expenses, it’s important to prepare for the future. Before you’ve stopped working and think you’ve finished your “preparing for retirement to do list,” be sure to consider and evaluate your credit options. While the number of credit options available to you in retirement may remain plentiful, remember that securing a line of credit or loan may be more challenging and time intensive if your source(s) of income is/are more complex. So you may want to consider applying for a line of credit before you have an immediate need and/or while you still have W2 income if you’re preparing for the future.

Your dedicated CommercePremier Banker is here to help! If you’re unsure of your streams of income or contemplating how to navigate getting a line of credit, we can provide assistance in preparing the essential paperwork and guide you along the way.