Volatility: What’s the Best Defense?

Thoughts and ideas on the recent market losses and volatility due to the Coronavirus scare, and general economic and political uncertainty. Recent panic caused by the spread of the Coronavirus (COVID-19) has led to a stock market decline and has many investors feeling anxious. While portfolios will see ups and downs and this is a normal part of investing, the recent sell-off was sharp. It is in times like these that our team can best serve you by providing perspective on how we see these issues playing out.

The Best Defense is a Strong Offense
Nobody knows where the market is heading. Therefore, we believe that research and pro-actively planning, and implementing strategies that factor in potential significant drops in the market is critical. This is a strong offensive play in the world of portfolio planning (especially for those closing in on retirement). And what we consider to be the best defense to market volatility.

When the market heads up, and we get by this event-driven volatility, having a portfolio that has allocations to global equities to take advantage of market growth is critical. And if the market continues to fall, it’s critical to protect your principal with allocations to Fixed Indexed Annuities.

Either way, this “Hybrid Income Portfolio” strategy balances protection and growth, regardless of where the market heads. This is especially significant now, as equity prices are coming off all-time highs and bond prices are also high, as their yields have fallen to all-time lows. As we have seen recently, market conditions can change quickly in both directions.

For these reasons and more, we believe a Hybrid Income Portfolio to be a powerful alternative to other portfolio strategies. It’s also backed by academic research and has proven itself time and time again.*

The Impact on the Global Economy
Though the impact on human life is at the forefront of everyone’s concerns, there are many uncertainties surrounding the potential impact of the virus to the global economy. The global economy was already fragile from the nearly two-year-long U.S.-China trade war and the spreading virus will likely impact economic growth. While more equity market weakness is possible as the virus continues to grow globally, the downside could be limited as governments and global central banks have possible tools to combat the potential death toll and economic impact.

From the human life perspective, China took severe steps to limit the spread of the virus including forced quarantines, limited social contact, and significant population testing. We expect other inflicted nations to follow suit. From an economic perspective, global central banks including the People’s Bank of China and the Bank of Korea have already increased monetary stimulus or plan to do so. As we have seen in the U.S., and, specifically the U.S. housing market, over the past year, easing monetary policy can provide a potential economic stopgap. Furthermore, in the U.S., given unemployment levels near 50-year lows, the consumer, the driver of the current economic expansion, remains in good shape. We do expect market uncertainty to continue but downside may be limited. We also think the impact to markets will vary by sector. Sectors related to travel, such as cruise lines, airlines, and hotels are already taking a hit. Online entertainment companies and streaming services are performing better.

The team here at Retire Smart Network will continue to monitor and update information about our nation’s financial and physical health. If you’d like to discuss your portfolio strategy with a retirement planner or have a question about any retirement/financial topic, simply reach out and we’ll make it happen.

P.S. Don’t forget the Best Defense is a Strong Offense when it comes to protecting your health too…proper hand washing, eating right, getting enough sleep, avoiding sick people, stocking up on meds, food, water and household supplies, and having an attitude of positivity and gratefulness. Worrying about health or finances isn’t a productive use of time. Embrace optimism and reach out to us at any time.

*Sources:

  1. Morningstar Analysis, June 23, 2017, Snapshot Report.
  2. Roger G. Ibbotson, PhD Chairman & Chief Investment Officer, Zebra Capital Management, LLC Professor Emeritus of Finance, Yale School of Management Email: ZebraEdge@Zebracapital.com, Fixed Indexed Annuities: Consider the Alternative, January 2018.
  3. Shift Away from Potential Risk and Toward Potential Return, Nationwide (Morningstar), 06/16.

Crucial Conversations You Need to Have Before Retirement

Being appropriately prepared for retirement involves far more than simply stashing away money in a 401(k), annuity, or some other savings instrument and walking off into the sunset.

When laying the foundation for one’s golden years, they should also discuss their retirement with a number of key people in their life – such as a spouse or domestic partner, children, employer, and maybe even employees if they’re a small business owner.

Almost all of these people will either be impacted by your retirement or will personally have an impact upon it, making such conversations incredibly important.

“Retiring is a major milestone in a person’s life, and it creates a ripple effect that impacts everyone close to the retiree,” says Marc Diana, CEO of MoneyTips. “Making sure your network is prepared for your retirement is vital to ensuring as smooth a transition as possible.”

Here are some of the key people to engage in discussion, both when you’re planning a retirement strategy and as your departure from the workforce gets closer to being a reality.

Your Spouse or Partner

It is often assumed by couples that they have a shared vision for retirement, or that the vision (even when it is shared) is realistic, says Delynn Dolan Alexander, a financial advisor with Northwestern Mutual.

To check whether you’re actually on the same page about your future plans, discuss what it is that you would like to do once you are no longer working, and whether there’s an expense associated with fulfilling those plans. If there is, how are you planning to pay for it?

Determining where it is you want to live, both the location the type of residence, is also important ground to cover, as is deciding whether you want to continue working in any capacity during retirement, and what your financial priorities will be.

“In other words, are you spending all of your savings, or leaving a legacy for the kids or charity?” explained Dolan Alexander.

Coming to an agreement regarding long-term housing plans is particularly important, stresses Jennifer Beeston, vice-president of mortgage lending at Guaranteed Rate Mortgage. Next to medical care costs, housing is the most expensive and couples vary wildly on what they envision for their housing upon retirement.

“Some people want to stay in their current home while others want to downsize or move to be closer to their children,” said Beeston. “You want to have a game plan regarding housing before you retire as each scenario requires a different set of monthly costs to consider.”

Your Children

Like a spouse, your kids will also likely be impacted by the changing finances associated with your departure from the workforce.

Have a frank discussion with children about your plans, especially if your retirement fund is not as established as you would like it to be, suggests Mark Charnet, founder and CEO of New Jersey-based American Prosperity Group.

In that conversation you may find yourself pointing out to your children that you will now be on a fixed or reduced income and that although you’d like to be as generous as you may have been in the past, it will no longer be possible. Charnet even suggests telling your children that they should no longer ask you for money.

Another important topic to cover with children prior to retirement is your housing plans.

“Many people are surprised at the vehemence with which children are attached to an old childhood home, or conversely many retirees hold on to homes even though children have set up independent lives and households elsewhere,” says Diana.

Familiarizing your children with your medical directives and providing them with the contact information for your financial advisor, estate planning attorney and CPA, is also advised.

This process can be simplified by establishing an online vault for all of your important documents and giving your children access, says Brian Saranovitz, co-founder of Your Retirement Advisor.

“While not everyone will be comfortable sharing their financial details with children, it’s good to give them some insight into your financial preparations for retirement and any financial directives in your will,” adds Saranovitz. “Sharing your plan will not only help them upon your death, but also during your retirement if you need assistance. It can also teach them some valuable lessons about preparing well for retirement.”

Your Employer

There’s no getting around it – employers have a profound impact upon retirement. During working years, an employer plays a key role in the growth of your nest egg. And as retirement nears, it’s time to find out if there are any company policies that may impact pensions or other retirement income.

“It’s important to seek help from your employer on transitioning out of the workplace and making sure you understand your options with your company 401(k) or pensions, profit sharing, and healthcare options,” said Saranovitz. “If your employer doesn’t offer these services, a financial or retirement planner can help you, especially with the options for rolling over your 401(k).”

Additionally, it’s a good idea to give your employer ample notice of your planned departure date. “A rule of thumb is that for however many years of experience an employee has, that’s how many months it takes to replace him or her, so the more warning you can give your employer the smoother the transition will go,” suggests Diana.

Financial Planner or Advisor

Retirement can seem like a dark cloud hanging over many people’s heads. Not because we don’t want to retire, but rather because of the money questions surrounding that all-important distant horizon.

Fears about retirement preparations need to be faced head on, and a financial planner can help, says Dawn-Marie Joseph, founder of Michigan-based Estate Planning & Preservation.

“Most people dream about not going to work every day and having freedom from their alarm clock. But when you think of retirement and the amount of money you have or have not saved, it can be overwhelming,” says Joseph. “There’s no time like the present to think about and act on the savings you will need for retirement.”

Begin by creating a draft retirement budget for yourself and then meet with a financial planner to help map out a solid game plan that includes helping your money last for as long as you think you will need it. Bring your spouse or partner to that meeting with your financial planner, and work as a team to put together a realistic, long-term financial strategy.

“The last thing you want to do is outlive your savings,” says Joseph. “Retirement savings can be accomplished. It is all about planning to get it done.”

To find out if you’re having the right conversations to plan for retirement, or how to have those conversations please email us at lynnt@herretirement.com or call 508.798.5115.

3 Ways to Cut Your Investing Fees

In this U.S. News & World Report online article Your Retirement Advisor co-founder, Lynn Toomey discusses ways to cut fees and add more life to your portfolio.

Brian provides his take on what steps investors can take to reduce fees, beginning with education. “We believe that in order to reduce costs, one must be committed to getting educated: doing research and questioning your advisors on their strategy and fees,” says Lynn Toomey, co-founder of Her Retirement, in Leominster, Massachusetts. “If you’re a do-it-yourself investor, you’ll need to do much more research to understand the particular investment options, their performance and their fee structure.”

The article goes on with additional comments from Brian about hard to find fees in various investments. “Saranovitz says that hidden fees are especially difficult to uncover with most funds. “Look through the details of a prospectus and you won’t even be able to decipher all of a fund’s fees,” he says. “The internal transaction fees and commissions paid by mutual funds are typically not disclosed.”

Brian also provides insight for DIY investors suggesting the use of passive index funds, “Whether you’re doing your own investing or working with an advisor, you can fight back fees and potentially receive higher returns by utilizing a combination of low-cost passive index funds and ETFs, and actively managed funds,” Saranovitz says.

“Here’s how he breaks that strategy down:

  • Index funds and exchange-traded funds typically use passive indexes and charge a fraction of the fees that most active money managers charge. They also have low turnover in their portfolios keeping costs low. However, while less expensive, these funds won’t outperform the index.
  • Actively managed funds are managed to outpace the indexes and are appropriate for investors who are concerned about losses in a down market since these managers can use strategies to guard against this risk. It’s critical to pick active managers with care, choosing those with low fees and positive results in both negative and positive markets, as well as those with low turnover (which is the percent of holdings that are bought and sold each year).”

And finally, Brian’s comments end with his input on reducing fees when working with an advisor, “If you’re working with a professional investment advisor, you’re best served by working with the lowest cost, highest quality advisor you can find, Saranovitz says. “But beware the industry is plagued with high-fee advisors,” he says. “According to industry data, advisor fees average 1.65 percent and can go as high as 2 percent for a $500,000 portfolio, which is definitely an expensive proposition.”

“There are more client-friendly advisors and fee structures, but you need to do a little more research to find them. Look for an advisor who offers either a flat rate fee or a deeply discounted annual percentage fee based upon assets under management,” Saranovitz says.

The article finishes with a sentiment that Brian wholeheartedly believes in (as evidienced in his comments in the article) and shares with his students and clients , “Long-term investors really can’t afford to lose up to 40 percent of their portfolio’s value to high fees.  So, take a stand, get educated, and fight back on high investment fees. Decades down the road, when you’re counting your money in retirement, you’ll be glad you did.”

Read more about our perspective on fees, access a fee checklist to share with your advisor or get the details on our affordable and flexible fee structure.

Request a complimentary fee analysis of your portfolio  today or call us at: 508.798.5115

 

Why Simply Saving for Retirement Isn’t Enough? Part 2

As I mentioned in part 1 of this multi-part blog post, simply saving for retirement isn’t enough. There’s a myriad of things that can go wrong in retirement. And you MUST be prepared. Preparedness is the key to many of life’s challenges. Unfortunately, many simply “put off” planning for another day. Days turn into weeks, weeks into months and months into years and before you know it, BOOM, retirement is right around the corner. And you’re not ready. This bring me to our first and most important retirement threat:

Neglecting to prepare, either on your own or with a retirement specialist, a comprehensive plan that addresses all the potential threats and risks we all could face in retirement, as well as your income needs and income projection. Will you have enough to last throughout retirement and how will you fund the emergencies of retirement? Her Retirement offers a full “Are You Ready” assessment to determine any gaps in your plan, or to create a plan for you.

Here’s 5 other threats to consider. We’ll cover several more in part 3 of this blog series.

  1. Death of a spouse (without life insurance). While it’s true many pre-retirees are over-insured, the opposite is true as well. Life insurance is certainly critical while you still have a mortgage or other debt obligations, as well as young children to support. But we also feel that you do need life insurance as you are nearing retirement.  The threat is that you or your spouse could die without insurance and you would need to take from your retirement savings to cover your living expenses.  More than 2 in 5 Americans say they would feel a financial impact within six months of the death of a primary wage-earner, according to a 2015 report from the industry group LIMRA and the nonprofit group Life Happens. In addition, 30% of Americans think they don’t have enough life insurance, the report said. Term life insurance policies can be aligned with your retirement age so that it can cover you and your spouse during those important wage earning years and replace the earnings in the event of a pre-mature death of either partner. Her Retirement offers a full life insurance assessment to determine if you’re under-insured or over-insured, and then we can help match you with the right insurance based on your circumstances.
  2. A healthcare crisis. Unfortunately, medical debt is a leading cause of bankruptcy for many. For those that can afford to cover illness or medical emergencies with their savings, it can prevent you or your spouse from working in the final stretch before retirement. In addition, covering these expenses significantly impacts your retirement nest egg. There’s several types of insurance to consider including disability insurance and long-term care insurance.  Her Retirement offers a long term care/medical insurance assessment, as well as some unique ways to fund these expenses outside of insurance.
  3. Scams and more scams. Retirees are a big target for scammers. We’ve all heard the nightmare stories. These scammers take advantage of people’s fears. A perfect example are life insurance policies marketed at 702 retirement accounts. Scammers will sometimes use early retirement seminars as a forum to sell these policies. Financial Industry Regulatory Authority (FINRA), the industry oversight organization, advises buyer beware for any scheme or program, like these that promises unrealistic returns of 12% or more, as well as anything promising that you can retire early and/or make more money in retirement than you did in your working years. Here’s a link to the more scams and how to protect yourself and your loved ones
  4. The kid(s) that come back. Some call these boomerang children. Just when you think you have an empty nest, some one of them or worse yet, all of them return!  I just experienced this myself with the return home of my 24 year old son. While a part of me was excited to have him in the house again, the other part of me was calculating the cost to have him back home. Many pre-retirees continue to support children who are considered adults. According to the March 2015 study by Hearts & Wallets, an investment and retirement research firm, those 65 years or older with financially independent children are more than twice as likely to be retired than people of the same age group who financially support their adult children. That’s because those who are still supporting their kids are often putting off retirement to do so,said Hearts & Wallets co-founder Chris Brown. Ideally, we want to help our children become independent from the get go so they can avoid ending up on your doorstep, but we know this isn’t always the case, especially in these times. My son attended one of the best colleges in the world and he’s in my spare bedroom as I write this. The best way to protect your retirement savings from the kids that come back is to help them get financially independent as quickly as possible and ask for them to pay their fare share of the household expenses. Read these tips for surviving your child’s return home (I think I need to read this a couple times!)
  5. Giving grandma a hand out and a hand up. The statistics are pretty convincing that baby boomers are caring for their aging parents and giving up some of their retirement savings in the process. My mother used to say, “I never want to be a burden to my children.” And so far she hasn’t been a burden at all. But, she was properly prepared and to her credit worked as a teacher for 35 years and has a good pension and a good medical plan. Some 11% of adult children under 65 provide financial assistance to their parents, according to the National Institute on Aging’s 2015 Health and Retirement Study. Further, 25% of adult children under age 65 help parents with things like chores and personal care, often at the expense of having their own paying job. In fact, people age 50 and older who care for parents lose an average of $303,880 in pay, Social Security and pension benefits, according to a 2011 MetLife report! Here’s some resources for caring for your elderly parents

While it’s unrealistic to avoid these and many other retirement threats, it’s best to consider what you may face just before retirement and in retirement and make sure you have a Plan A…and a Plan B. This plan, as we discussed above, needs to include not just you, but your spouse and your entire family.

To chat about your plan with an affiliated advisor, please request any one of our assessments here.

Why Simply Saving for Retirement Isn’t Enough? Part 1

The other day I was having lunch with a friend and we were talking about retirement and the services that Her Retirement provides. She mentioned that she’s been very good about saving money in her 401(k) and said, “I’m all set for retirement.”

This comment made me realize that the average person might also believe the same thing. Many people think they’ve worked hard for 20, 30, 40 years and they’ve saved quite a little nest egg. Retirement plan done. No need to do anything further, but keep working until you feel ready to retire and give your boss or your business the boot.

Well folks, sorry to break it to you, but this is NOT a retirement plan. It’s certainly a great start and if you have more than 4x your salary saved and your 50 let’s say, you’re in pretty good shape, savings wise. However, when you move from the accumulation phase of life (pre-retirement) and into the de-accumulation phase (retirement), you need a comprehensive plan that includes sophisticated strategies to protect you from all the inherent risks you’ll face in retirement. There’s so many things that can go wrong in retirement. You MUST be prepared. And the best way to be prepared is to be pro-active…either learning about the risks and methods to minimize them, or work with a retirement specialist like Her Retirement to understand the blind spots and then put fortification around your savings so that it lasts throughout retirement.

With the right plan and strategies, you can not only mitigate risks, but you can actually make your savings last even longer in retirement (up to 10 years or more). In our full Retirement Income Projection Analysis, we show you the impact (and importance) of:

  • Re-allocating your portfolio (to include less risk/safe money options, improve your investment return and significantly reduce fees)
  • Reducing your taxes as close to 0 as possible
  • Maximizing your Social Security filing strategy to get the most money from this critical benefit
  • Determining your most tax efficient withdrawal or draw-down strategy

 

In our next few series of posts, we’ll dig a little deeper into what can go wrong in retirement and more reasons why simply saving for retirement is not good enough. Stay tuned.

In the meantime, we welcome you to learn more and take one of our new e-classes; try our QuickStart Income Calculator/Report, request a complimentary “Am I Ready” assessment or any of our other free or fee-based assessments.

What is an Annuity & Why Should I Consider Them for My Retirement Plan?

Annuities can be a valuable component of your retirement plan and income during your retirement…depending upon your goals and objectives. Like all strategies we review here in our blog, we strive to provide objective, independent and truthful information.

What is an annuity and how can it benefit you? Annuity contracts are purchased from an insurance company. The insurance company will then make regular payments — either immediately or at some date in the future. These payments can be made monthly, quarterly, annually, or as a single lump-sum. Annuity contract holders can opt to receive payments for the rest of their lives or for a set number of years. The money invested in an annuity grows tax-deferred. When the money is withdrawn, the amount contributed to the annuity will not be taxed, but earnings will be taxed as regular income. There is no contribution limit for an annuity.

There are two main types of annuities:

  • Fixed annuities offer a guaranteed payout, usually a set dollar amount or a set percentage of the assets in the annuity.
  • Variable annuities offer the possibility to allocate premiums between various subaccounts. This gives annuity owners the ability to participate in the potentially higher returns these subaccounts have to offer. It also means that the annuity account may fluctuate in value. Indexed annuities are specialized variable annuities. During the accumulation period, the rate of return is based on an index.

Watch this video to learn more about Indexed Annuities and how they can help your retirement plan.

Case Study: Robert’s Fixed Annuity

  • Robert is a 52-year-old business owner. He uses $100,000 to purchase a deferred fixed annuity contract with a 4% guaranteed return.
  • Over the next 15 years, the contract will accumulate tax deferred. By the time Robert is ready to retire, the contract should be worth just over $180,000.
  • At that point the contract will begin making annual payments of $13,250. Only $7,358 of each payment will be taxable; the rest will be considered a return of principal.
  • These payments will last the rest of Robert’s life. Assuming he lives to age 85, he’ll eventually receive over $265,000 in payments.

Robert’s annuity may have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. His annuity also may have surrender fees that would be highest if Robert took out the money in the initial years of the annuity contact. Robert’s withdrawals and income payments are taxed as ordinary income. If he makes a withdrawal prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies).

If you’d like to chat with an affiliated advisor about annuities and incorporating them into your retirement plan, let us know by requesting a 1-on-1 discussion. We’re happy to help.

 

Perks of Starting an Encore Career!

In a previous blog, we looked at the benefits of a Phased Retirement.  Basically, the main benefit was to keep the mind active and help the recent retiree have a purpose in their daily life.  Another route to fulfill these needs can be through an encore career.  There are many different ways to fulfill this, either through paid or unpaid, new or known career knowledge.  Below we highlight a few ways to start an encore career.

  • Volunteer Work: For those who are truly financially independent in their retirement, meaning they have enough to live the life they envisioned or are comfortable in their retirement life, volunteer work is a great way to keep the mind active and have a feeling of purpose, like they are making a difference in their weekly life. Volunteer work is also fulfilling because the retiree can choose which field they would like to work in, such as volunteering in the field of early childhood or helping those struggling to get back on their feet.  This flexibility may help the recent retiree feel fulfilled and passionate about what they are doing with their golden years.
  • Turning a hobby into a business: This is a path that many experts warn to think through carefully, because far too many people have plunged their entire retirement savings into a passionate hobby that simply didn’t turn into a business. But if the retiree has a limit of what they are willing to invest in their new visionary business, then this may be a path that is very fulfilling!  A hobby, such as knitting or gardening, in today’s internet age, can take off to a whole new sphere of success!  And doing what one loves (such as in the field of volunteer work) AND receiving a supplemental income from it can seem like a win-win: extra money and a passionate reason to get out of bed each morning.
  • Phased Retirement: As mentioned in a previous blog, phased retirement can benefit the retiree because they are able to stay active, it is in a field that they have vast knowledge in and they can receive a supplemental, part time income (depending on how many hours are scaled back). The need to have a weekly purpose is easily fulfilled and is an easier path than starting a new business.
  • A part time career: This is one that is most familiar to retirees, be it a greeter at a store, a cashier at the local grocery store or some other part time job, many retirees find this the easiest path to transition into.  There is no great commitment or taxing work to be done, but includes a flexible schedule and some form of supplemental income.  There are many businesses that actually look for recent retirees because they find that they are more dependable than some teenage part time workers and that they are flexible are in their schedule.
  • A brand new career: Similar to a part time career, this entails going into a new field, possibly an earlier passion that may not have been financially possible before. For example, being a tour guide at a local museum or national park or a speaker to children at a school, about what life was like back when.  Or it could be a totally new career, such as an Uber or Lyft driver, where the hours are decided by the retiree.
  • Advisor: Similar to a Phased Retirement path, becoming an advisor (either for a company that the retiree has worked for or a competitor) can help the retiree with supplemental income, but also to help feel needed and as if they are making a difference somewhere.

Regardless of which path the retiree chooses, we here at Her Retirement feel that staying mentally and physically active is important to maintaining a healthy lifestyle during their golden years.  Because after all, the golden years are meant to be enjoyed and to feel like there is a purpose to getting out of bed each morning.

Are you worried about outliving your retirement?

What is the number one fear of retirees?  According to a recent Allianz study, 60% of individuals’ feared that they would outlive their income or their portfolios’ ability to create an income for the remainder of their life.  According to research conducted by Transamerican Center for Retirement Studies, only 11% of people have even thought about how much they should invest in their retirement.  But of those who have already begun to plan on how much they’ll need for retirement, half admit that they are merely guessing as to how much they’ll actually need.  To continue with this study, 61% cited that they have a retirement strategy, but only 14% have it written down somewhere.  And less than a quarter have a Plan B in case their retirement plan doesn’t pan out.

To look at the current soon-to-be retirees, there are 76 million individuals who are part of the “Baby Boom” generation (those who were born shortly after the end of World War II). Yet these Baby Boomers are facing unprecedented hurdles when it comes to planning for their retirement:

  1. Previously dependable retirement income is disappearing or becoming less dependable (i.e. Social Security). 55% of those categorized as moderate wealthy consumers, felt they were more likely to be struck by lightning than to receive what they were promised from Social Security).
  2. With less dependable retirement income, such as Social Security, more Baby Boomers are forced to privately and personally finance their retirement.
  3. Increased life expectancy from previous retirees.

According to the Allianz study, Americans fear that a retirement crisis is developing (92% among all applicants and 97% of those in their late 40s), 61% were more scared of outliving their retirement income than facing death.  Among those aged in their late 40s, this number rose to 77%.

With all this uncertainty about traditional retirement planning being sufficient for the future, it is no wonder that many soon to be retirees are apprehensive about what the future will bring.  The good news is that there are financial experts to help guide those who are beginning or have been planning their retirement financing.  In order to quell the worry, make sure that your retirement affairs are in order and are working the hardest they can to keep you safe and secure during your most enjoyable years.

What’s the deal with Phased Retirement?

The day is finally here, RETIREMENT!  You wake up (when you please, although your body is probably still used to your rigid work schedule wake up), roll out of bed, brew a cup of coffee, sit down and…now what?  It seems the goal has been reached, the golden years are being redeemed, but yet, what’s the next part?  The list of things to accomplish and enjoy may be long: travel, hobbies that may have been neglected and new adventures to begin.  But what to do with the day to day?  This is where many retirees end up, not knowing how to transition from a regular 9-5 or other regular work schedule to being the boss of their own time.

The freedom and flexibility of retired life, for some, may seem scary and the confusing feeling of wanting to go back to work may creep in.  Many retirees cite that their day to day life deteriorates in some way from the lack of structure.  As human beings, we are very routine.  We get used to the safety of knowing what comes next in our day.  A lack of structure can be frightening and something that many do not expect to be a worry or fear in retirement, after all, as teenagers, don’t we yearn for the freedom away from our parents?

But alas, there is a solution.  Many retirees find that they don’t have to leave the workforce completely, but rather, they phase out their retirement.  They scale down their 40 hour work week to a few days and few hours a week.  The above situation may be one reason, but there are multiple reasons why recent retirees remain at their jobs, ranging from the need for a supplemental income to needing a purpose and routine to daily life.

Phased retirement is a program that many employers are implementing because it is also beneficial to the employer.  The benefits that the recent retiree possesses can help the transition process proceed smoothly.  In many cases, the recent retiree may serve as a mentor to the employee being trained to take over their position.  Or, they may stay on and act as an expert or advisor to the business, loaning their many years of knowledge.  For the retiree, they are able to continue to exercise their vast knowledge of their field and keep the wheels turning, both for their own mental faculty and the company.

Another added benefit to staying active during retirement (either through a hobby, volunteer work or phased retirement) is that the brain remains active.  Science has shown, that keeping mentally active helps to ward off dementia.  For example, studies have shown that those who speak multiple languages (therefore engaging various aspects of their brain) have a lower risk of Alzheimer than those who speak only one language.

Regardless, if your passion for your career continues past retirement or if you choose a new hobby to undertake, the main suggestion that studies seem to stress is to stay mentally active, to keep the wheels turning and to continue to have purpose and satisfaction in daily life.  Because as humans, we all seek self-fulfillment and purpose, which can often be lost in the free flowing world of retirement.

 

Benefiting from Reverse Mortgages responsibly during Retirement

Reverse mortgages have gotten somewhat of a bad reputation, often being seen as an irresponsible last option for people looking to resolve a financial situation.  But as with many things, if used correctly and with the right tools, they can actually be a good option as another source of income during retirement.  In order to qualify for a reverse mortgage, the applicant must be 62 years or older, have equity in their home, are able to pay property taxes, have homeowner’s insurance and are able to continue maintaining their home to a sufficient level.

Reverse mortgages have changed significantly in the last 10-15 years, especially since 2012.  Although complicated, reverse mortgages (with the advisement of a financial planner) can be a viable option for many entering into retirement.  Reverse mortgages (also known as the HECM program) is administered by the Housing and Urban Development Department and Federal Housing Authority.  Since 2012, an attempt has been made to make reverse mortgages a more viable option.  For example, to do away with the “irresponsible” reputation component, applicants for a reverse mortgage now have to undergo a more rigorous financial evaluation, hopefully deterring those who may be using a reverse mortgage as a desperate means.  All borrowers must also go through counseling sessions, have an appraisal on their home by the FHA and the house must be their primary residence.  After all of these qualifications have been met, the borrower may be approved for up to $625,500.  If the borrowers are unable to meet these standards (if they no longer reside in the residence) the loan must be paid back.  The approved loan is based on the value of the home, and can be paid in a lump sum, tenure payments, term payment, a line of credit or a modified tenure or term payment.  But the borrower is never held to one payment and can apply to have the payment method changed if their financial situation happens to change.

Several myths have also been dismissed about reverse mortgages, such as that a spouse who was not on the mortgage may be kicked out of the residence upon the death of the mortgage holder or that the owner of the mortgage loses the title to the home when they sign on the dotted line.

What is not a myth though, is that high costs are still an issue.  But as with many financial tools, shopping around to get a better rate can save the applicant money, as the initial costs for a reverse mortgage ranges anywhere from $2000 to $10,000.

A reverse mortgage is a non-recourse loan that is secured by collateral, which is usually property. If the borrower defaults or when the loan does eventually come due, the issuer can seize the collateral but cannot seek out the borrower for any further compensation, even if the collateral does not cover the full value of the defaulted amount.

So when is it ideal and responsible to use a reverse mortgage?  There are four situations which come to mind:

  1. Using a reverse mortgage so that a retirement portfolio can continue growing.
  2. Using a reverse mortgage line of credit once their retirement portfolio is no longer available.
  3. Using a reverse mortgage to pay off an existing mortgage or to pay for necessary renovations (either because of the age of the house or need for more accessible accommodations).
  4. Borrowers can also use a reverse mortgage to help supplement retirement income, i.e. using the reverse mortgage tenure payment option instead of annuities to help delay Social Security benefits or to help pay off taxes (in the case of Roth conversions) or to fund long-term care insurance premiums.

 

As with most financial decisions, it is important to consult a competent financial advisor to see if this is a route that is worth taking and also to consider your own unique personal situation.  Having all the tools in front of you, educating yourself and understanding your different options, is the best way to make sure that you are getting the most out of your retirement income.