Most investors who have planned for retirement have a mental picture: not answering to the Man, some travel, spoiling grandkids and maybe a second home. But unexpected expenses, failing health, or investment losses can derail plan A.
What’s plan B? How to you make up for a shortfall?
“Overspending has become a huge problem with the baby boomers and even the older generation,” says Jessica Weaver, an advisor and author of “Strong Woman Stronger Assets.” One reason, she says, is low yields on bonds, a traditional retirement income source. Also, inflation has ticked up and people are living longer.
“People aren’t planning through these issues,” she says. “The baby boomers worked so hard during their careers, and they feel now is the time to enjoy themselves. They have a hard time saying no to travel, gifts to kids and grandkids, and are spending too much. They need to have a plan B to fall back on when their savings start to diminish.”
[See: 16 Questions That Scare Investors, But Shouldn’t.]
Weaver offers these suggestions.
“They need to re-evaluate where they are spending money, find some part time income, downsize, take less trips, or a combination of all of the above,” she says.
The bad news is the most obvious strategy, cutting expenses, is often the most effective. Hoping to recover with the legendary 10-bagger, a stunning investment, may be just a pipedream, and so risky it could make things worse.
Still, experts suggest a number of ways to reduce the risk of a devastating setback, and to get the most out the recovery plan.
Limit fixed expenses. Probably the most useful strategy, this comes before things go wrong: avoiding expenses that cannot be quickly trimmed, like a big mortgage or large car payments. A large house probably has more property tax and maintenance costs.
“Cut the big stuff,” says Michal Strahilevitz, professor of behavioral economics at the University of Wollongong in Wollongong, New South Wales, Australia. “[Cutting] small pleasures such as subscribing to Netflix or going out for a nice dinner once a month are not going to make a huge dent one way or another, so learn to save on the big things. Scaling down on housing expenses is likely to make a far bigger difference.”
Benchmark. Many advisors recommend a full assessment of the investment portfolio focusing on how individual holdings have done against their benchmarks. Are the returns on your large-company stocks doing as well as gauges like the S&P 500 index? If not, can you switch to other stocks or funds in the same category that have done better, perhaps with less risk and lower fees?
Reallocating investments. A shortfall that threatens to last for years could indicate the need to change the mix of various categories of stocks, bonds and other holdings. While the first impulse is to flee to safety by building up cash and focusing on income-producing investments, it could pay to put more into growth-oriented investments to recover over time and blunt the effects of inflation.
“With Americans living longer and spending more time in retirement, many retirees could be at risk of outliving their savings,” says Jim Poolman, executive director of the Indexed Annuity Leadership Council. “It’s important to consider adding to a portfolio a savings vehicle that is explicitly designed to guarantee lifetime income, no matter the length of retirement.”
An annuity, for example. That is an insurance product that pays a steady income, usually for life, for an upfront payment. Many investors find that spending a portion of the portfolio on an annuity reduces the risk of wild swings in retirement income.
[See: 7 Dividend Stock Alternatives to Fuel Retirement Income.]
Tapping equity and how to invest it. Many retirees sit on substantial home equity that can be tapped by downsizing to a cheaper property or by taking out a loan. A reverse mortgage can provide a lump sum or guaranteed monthly income for life with no monthly payments. Instead, the interest charges are added to the debt and paid off after the home is sold by the owner or heirs. The lender cannot call the loan if the homeowner keeps up with maintenance and taxes. Because there are no payments, the owner does not need an income to qualify.
One option, the standby reverse mortgage, involves taking the loan as a line of credit that will incur interest charges only if money is actually borrowed. The credit line goes up each year according to a formula set by the federal government. An untapped credit line can be a sizable reserve in an emergency like a market slump, and will not erode the owners’ and heirs’ equity because there are no charges on a borrowing limit that is not used.
“The unused credit that is available grows each month regardless of what the home value does,” says Jason Cody Barnes, a banker at Florida-based Atlantic Reverse Inc., a reverse mortgage firm. “There is a lot of research coming out touting the benefits of this SRM (standby reverse mortgage) strategy”
Resetting priorities. Experts suggests retirees in trouble swallow hard and cut back on helping children and grandchildren.
“I see many retirees paying for their children’s expenses, such as college, housing, automobile, and even vacations,” says Carlos Dias Jr., a planner with Excel Tax & Wealth Group in Florida. “Spending is emotional, so you can tell a client it needs to be fixed but doesn’t mean they will.”
Lifestyle alternatives. Finally, experts suggest looking for ways to live a comfortable, satisfying life on a smaller budget. If cruising the Mediterranean is too expensive, maybe kayaking the Yellowstone would do.
“I always say have a plan B where you can still be happy and satisfied, but won’t cost as much money,” Weaver says.
Returning to work is a dramatic lifestyle change for a retiree but doesn’t have to mean crawling back to the old firm. After all, many retirees coming up short need only a fraction of their former income to make up the budget shortfall.
Another option is relocating to someplace cheaper, like another country, says Terry Heys, wealth manager at Allaboutannuities.com in Lynnwood, Washington.
[See: 7 Classic Inflation Hedges and Their Thorns.]
“Many seniors on small to no nest eggs are relocating to places like Panama or Costa Rica,” Heys says “They can live very well for $1,000 to $1,500 per month. They could live very nicely on their monthly Social Security.”
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6 Ways to Fix a Retirement Savings Shortfall originally appeared on usnews.com
