Unexpected costs can affect your pocketbook at any point in your life. Financial surprises are an inevitability, especially as you age. Full-time earners can usually overcome financial difficulties as they continue to work. But retirees…
Unexpected costs can affect your pocketbook at any point in your life. Financial surprises are an inevitability, especially as you age. Full-time earners can usually overcome financial difficulties as they continue to work. But retirees living from a limited income and finite nest egg may suffer more from sudden expenses. If you haven’t prepared for the unexpected, your long-term retirement security could be at risk. Here are eight ways to avoid and cope with financial challenges in retirement.
Plan ahead. Comprehensive retirement planning should include strategies to avoid financial difficulties. You might amass as much wealth as you can while you’re still working, then lower your expenditures as you approach retirement to make your money last. As with any retirement plan, the earlier you start preparing and saving, the better.
When establishing your retirement plan, don’t ignore the possibility of out-of-pocket health care costs and inflation. Remember to adjust your plan when needed, because these and other costs may increase faster than your original projections. If you don’t have a comfortable nest egg and margin of safety before your planned retirement date, consider extending your working years to sure up your financial security.
Insure. Insurance is a way to reduce the risk of unforeseen events that may put your retirement savings at risk. Before entering retirement, consult an insurance agent about the insurance that is advised for your situation. Health insurance is a must, especially before Medicare eligibility. Those approaching retirement may also consider buying long-term care insurance. Though expensive, long-term care insurance protects you from the financial burden if you become incapable of caring for yourself. Comprehensive home and catastrophic policies will protect you from unexpected damage and liability. Insuring against large out-of-pocket costs will protect your assets and help you sleep at night.
Maintain proper asset allocation. As you enter retirement, your portfolio of assets should be adjusted to reflect your risk tolerance and spending needs. Funds that you will need in the short-term should be kept out of volatile and illiquid long-term investments. For example, don’t invest in stocks or real estate with money you intend to spend in the next few years. If there’s a recession, your assets may lose value and need time to recover. Avoid forced selling and emotional decisions by making sure that your portfolio is properly weighted for your needs. Keep a supply of cash to fund your lifestyle when markets oscillate beyond your comfort zone.
Budget. When you retire and the steady employment income stream is gone, budgeting becomes even more important than during your working years. Budgeting can be done with a pen and piece of paper, or with comprehensive budgeting tools. Whatever method of budgeting you prefer, a budget will keep you from overspending each month, leaving enough money to cope with financial difficulties. When creating a budget, start by identifying costs for necessities such as housing, food, clothing and transportation. Then make space for incidental spending and entertainment each month. Set aside a dedicated emergency fund and consider adding to it from your retirement income to increase your financial security.
Reduce lifestyle. In the early years of retirement, some retirees continue spending as if they still have a full-time income. The numbers may work for a while, but after a decade or more, your savings levels may not keep pace with your retirement needs. Eventually, frivolous spending may start putting your retirement security at risk. Spending cuts may be necessary to keep your footing sound. The sooner you make cuts to your lifestyle, the longer your financial security will last.
But you also need a plan to enjoy yourself in retirement. In fact, during the early years of retirement, you might want to inflate your lifestyle somewhat while your health is optimal. As retirees age, they tend to spend less on lifestyle expenses and more on medical costs. Make sure you leave enough to cover health care needs later in retirement.
Tap home equity. A thorough retirement plan should include both short and long-term housing needs. If you continue to live in a home you’ve owned for some time, chances are you’ve accumulated significant equity. When needed, you can use the equity for other costs.
There are several ways to access the equity in your home. Selling your home gives you access to the entire value, minus fees and tax implications. You can downsize and pay cash for a less expensive home or rent to release yourself from the burden of home maintenance. If you want to stay in your home, consider a home equity loan or line of credit. Borrowing against your home can provide quick access to funds to cover unexpected costs. A reverse mortgage allows older homeowners another option to access home equity, but these loans have complex rules and are not right for everyone. Do your research before committing to an agreement, and don’t hesitate to seek help from a trusted adviser.
Seek assistance. For retirees who need assistance, several federal and local organizations are available for the elderly. The U.S. Department of Housing and Urban Development provides public housing vouchers to qualified seniors. There’s also a multifamily subsidized housing program that provides rent assistance in privately run and public housing options. Food programs such as the Supplemental Nutrition Assistance Program run by the U.S. Department of Agriculture can be helpful to eligible seniors in need. Many localities provide nutritional assistance for seniors too. Even small amounts of assistance can be helpful for those with limited resources, and it frees money to cover the cost of other necessities.
Go back to work. Many retirees become employed again and perform meaningful work in their community. Sometimes going back to work becomes a necessity when faced with financial difficulties. Working in retirement has several benefits including social and physical activity, mental engagement, self confidence and extra income. A few extra hundred dollars per month can make a big difference in your quality of life. If necessary, many states have programs to assist seniors in training and finding appropriate work. It’s best to work at the beginning of retirement while you’re still healthy. A job can also extend the longevity of your existing savings and give investments more time to grow. Find a job you enjoy or use skills from your previous career to maximize your earning potential.