Thursday, January 27, 2022

Retirement Income: Making Your Money Last a Lifetime

Currently in the U.S., the typical Baby Boomer between the ages of 65 and 74 in the U.S. has financial assets with a median value of about $50,000 in 2019 values, according to the Federal Reserve.  This sum, in addition to your Social Security benefits and any other pensions you will receive, needs to last the rest of your life. How can you turn these assets and income sources into a comfortable retirement? Most retirees worry that they will spend their money too quickly, leaving them destitute at the end of their life. As a result, they are looking for a practical way to make sure their assets last as long as they do.

What can you do to reduce your risk of outliving your money, while still being able to benefit from the money you have managed to put aside for your retirement?

Compare Your Retirement Expenses to Income

Your first step is to total up how much it costs you to live each month, including occasional expenses such as the cost of travel, home repairs, medical bills, and property taxes.  

Then, total up the amount you will receive in Social Security benefits and other pensions, and compare the two figures.  Hopefully, the comparison of your income to your expenses will be very close. If not, you will either have to cut your cost of living, or make up the difference by increasing your income or retirement assets.  Even if the gap initially seems large, don't panic!  There are many ways to make up the difference.

How to Cut Your Expenses

Your first step is to cut your expenses, especially if you do not have a large amount of retirement savings. There are a number of ways to do this. Here are just a few suggestions:

Downsize to a less expensive home, OR, if possible, pay off your current mortgage, OR refinance the mortgage so your payments are much lower.  Any of these changes could save you hundreds of dollars a month.

Switch from original Medicare and an expensive Medicare Supplement plan and change to a Medicare Advantage plan, instead.  This could save you hundreds of dollars a month.

Get rid of your current landline phone service, and use your cell phone, only.

Look for the least expensive plans you can find for cell phone service, cable television, internet access and similar services you use. Eliminate rarely used streaming services and similar small expenses that have a way of adding up quickly. However, try not to eliminate services which you find useful, or that bring you pleasure, or that improve your safety and security.

Consider a Reverse Mortgage

If you want to remain in your current home, and have a large amount of equity in the house, you might consider getting a reverse mortgage which you could use to pay off your remaining mortgage without requiring you to make payments on the loan.  The downside of this is that the principal on the loan will remain, and interest on the loan will accumulate until you move out of the house.  By that time, the interest could have eaten up your equity, not leaving you anything to pass on to your heirs.  

You can avoid the accumulating interest by making small payments on the second mortgage, if you can afford to.  However, before entering into a reverse mortgage, you should thoroughly investigate how much interest would accumulate, how much the monthly payments would be if you wanted to pay the interest off each month, and any other questions you have.

While a reverse mortgage is not right for everyone, for some retirees it is a good way stay in their homes for the rest of their lives.  The older you are when you begin a reverse mortgage, the better choice this is, because there will be less time for the interest to accumulate and eat up your equity. 

How to Increase Your Income

Once you have reduced your expenses as much as you comfortably are able to, then you need to look at your options for increasing your income.

The longer you work before you begin to collect your Social Security and pension benefits, up until age 70 for a worker and the mid-60s for widow's benefits, the more money you will receive each month.  If you are concerned about having a shortfall in retirement income, wait as long as possible to begin collecting these benefits.

If you have already retired, another way to increase your income is to continue to work part-time after you leave your full-time pre-retirement job. There will be a cap on how much money you can earn, at first, if you are working and collecting Social Security simultaneously, prior to your full retirement age. However, this cap goes away once you are at your full retirement age.  This is another good reason to wait to collect your Social Security benefits.  

If you have not retired yet, check the specific age limits at the time of your planned retirement, so you know if you will have a temporary cap on your earnings.  Once you are able to get your Social Security benefits and work without an income cap at the same time, the extra money could make you much more comfortable.  It could also help you continue to build up your savings, so you will have more money available when you no longer are able to work.

Find an Easy Part-time Job

Consider part-time jobs you can do from home or which will not be too exhausting for you.  For example, you may be able to tutor people online or help neighborhood children with their homework, give lessons in some skill you have (music, art, cooking, etc.), or sell your crafts or artwork.  Depending on your life and work experience, you might also be able to help people prepare their taxes, or deal with common computer problems, or be a dog walker or pet sitter.  If you like to write, you could consider writing online articles for a site like TextBroker.

Do Not Get Scammed!

You should not have to pay anyone anything in order to get a part-time job from home.  If someone asks you to buy something, it is a scam.  Start your own little home business, or work for a reputable company.  Check it out carefully with the Better Business Bureau and by looking for online reviews. 

Decide How Much Money to Withdraw from Savings Each Year

If your Social Security Benefits and pension will not cover your expenses, you can further enhance your income by using a small portion of your savings each month to make up the difference.

The younger you are when you begin dipping into your savings to cover expenses, the less you will be able to use, so wait as long as you can before taking this step. 

If you are in your 60's, it is advisable that you begin by taking out no more than 3% a year from your savings.  Each year, you can take an additional .03% of the total remaining balance to help compensate for inflation. Doing this, the money should last as much as 33 years or more, depending on the interest, dividends and asset appreciation over the years.  If you have a 401(k) or an IRA, you will not be required to start taking minimum distributions from those accounts until you are in your 70s (they periodically increase the age of these required distributions).  However, if you want to begin to enjoy the benefits of your savings before that age, and you feel you can afford it, you are not required to wait that long.  

If you are able to wait until you are in your 70's before you start dipping into your financial assets, you could begin taking 4% a year, increasing it by .04% of the total remaining balance each year.  In this way, your money will last another 25 years or more.  Make sure you take out at least enough to meet the Required Minimum Distribution, so you do not get hit with a surprise tax bill on your assets. 

Finally, if you are in your late 70s or older before making withdrawals, or if you have a reason to believe you are nearing the end of your life, you can start removing 5% a year, increasing the amount by .05% a year of the total remaining balance.  In this way, your money could last 20 or more years, which will meet the lifetime needs of most people.

For a more detailed approach on how to make your money last during retirement, you will want to read, "How to Make Your Money Last: The Indispensable Retirement Guide." (Ad) It delves much deeper into the specifics of making sure you have a financially secure retirement.  

Don't Forget to Set Aside an Emergency Fund

Life comes with surprises, as we all know.  Over the years, you may need to purchase a new car or repair the old one, or you may have an adult child move in with you because of a setback in their life.  You may develop an expensive health problem, need to travel to see a sick relative, or decide to help a grandchild.  You may even need to hire a caregiver for a short time.  If you begin to dip excessively into your total assets to cover these expenses, you could face a major shortfall in the future, if you are not prepared.

As a result, it is good advice to continue to set aside a portion of your income in an emergency savings account.  In fact, if you have adequate financial assets at the beginning of your retirement, you may find it helpful to set aside at least $5,000 to $10,000 in an emergency fund from the very beginning, so you are not forced to sell stocks when they are down.  Add to this fund whenever you can, and only remove money from it in a true emergency.  This extra emergency account will reduce your fear that you might need to dramatically cut the amount you can safely remove from your retirement savings each month.

Interesting Statistics About Retirement Savings

About 75% of grandparents have admitted that they are willing to offer financial help to their families. (Make sure your own expenses are covered first, though. Supporting adult children is one of the most common drains on the finances of retirees.)

About one-third of retirees have more financial assets 17 to 18 years AFTER they retire than they did at the beginning.  This is because they often continue to save money and only use a small portion of their dividends to cover their expenses, which allows their assets to continue to grow.  This means that, with careful planning, you can become more financially secure the older you get. 

Many retirees overestimate what their expenses will be after they retire.  After the first few years, they may find that they are not traveling and entertaining as much as they did when they were younger.

Since the recession of 2008, there has been an increase in the purchase of multigenerational homes.  Because housing averages about 35 percent of the spending for people over age 65, sharing a home with an adult child can save a retiree a lot of money. 

Another helpful guide to financial planning for retirement is the book "The Ultimate Retirement Guide for 50+: Winning Strategies to Make Your Money Last a Lifetime." (Ad)  Good planning is essential in your quest to not outlive your savings.

Bottom Line:  If you cut your expenses, work as long as you can, build your pensions, and grow your savings, you can have a comfortable retirement.  Most of the recommendations in this article came from an AARP Magazine article dated April/May 2021.

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 - Mohamed Hassan photographer

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