Like the best-laid plans, retirement planning works best when it’s proactive — not reactive — giving you the freedom to make decisions on your terms instead of in response to surprises. As the American population continues to age, there is an increased and renewed focus on this critical preparation.
Why is proactive retirement planning important?
Proactive retirement planning ensures you have the financial resources to cover daily living expenses, healthcare costs, and leisure activities without outliving your savings. Every day, an estimated 10,000 Americans turn 65,1 and with life expectancy nearing 80 years,2 financial planning today encompasses much more than it had in previous generations.
While it would be convenient if there were a single best retirement strategy applicable to everyone, this simply is not the case. The reality is that a secure retirement depends heavily on how much you have already saved. Unfortunately, a recent study found that 20% of Americans have no retirement savings at all, and more than half (61%) fear they won’t have enough money to support them in retirement.3
Preparing for retirement should be as proactive as possible. The ultimate goal is to be ahead of the curve so that variables like major life events or market volatility do not undermine your financial security. While you should consult with a trusted financial advisor for your unique circumstances, consider the following strategies for a smart retirement plan.
How to create a comprehensive retirement plan
Creating a comprehensive retirement plan involves estimating future expenses, budgeting for healthcare, managing debt, and establishing a reliable withdrawal strategy. Whether you are just beginning to develop your plan or already have one in place, you can never be too thorough.
Estimate your retirement expenses
The best place to start is by taking account of what you anticipate your retirement spending needs to be. By having realistic expectations about post-retirement spending habits, you will be better able to determine your required retirement portfolio size.
One of the biggest retirement mistakes people make is underestimating their expenses. Start with easy-to-predict expenses such as housing, electricity, and other utilities. From there, work toward costs that are more likely to fluctuate. Remember to take travel plans, gifting habits, and hobbies into consideration, too.
Budget potential healthcare costs
Healthcare is often one of the largest expenses in retirement. While Medicare will pay some expenses, premiums are expected to increase, and severe health challenges could create significant out-of-pocket costs. A recent study from Fidelity revealed that a 65-year-old retiring today can expect to spend an average of $172,500 healthcare expenses during retirement.4
To protect their nest egg, many seniors consider opting for long-term care insurance, which can help with expenses not covered by Medicare.
Build up your emergency fund
An emergency fund is a cash reserve specifically set aside for unplanned expenses or financial emergencies. Do you have three to six months’ worth of basic living expenses prepared? According to a recent report from the Federal Reserve, 37% of adults don’t have the funds to cover a $400 expense.5
It’s imperative to have an emergency fund you can readily tap into for large, unexpected expenses. A Home Equity Conversion Mortgage (HECM), also known as a reverse mortgage, lets you do exactly that. By tapping into your home equity, you can establish a “safety net” for later use.
Downsize your debt
Before you retire, you should aim to retire as much debt as possible, too, to minimize the amount of income spent on interest payments. Many choose to start by addressing credit card debt due to high rates, before focusing on debts with fixed rates such as a mortgage or vehicle loan.
If you don’t have enough money to cover minimum monthly payments, a reverse mortgage can be a smart solution. Available to homeowners ages 62 and older, a reverse mortgage allows you to access proceeds to pay off an existing mortgage, and remaining funds can be used to consolidate other debts. And the cherry on top: with a reverse mortgage monthly mortgage payments are optional — so you’re not adding a new line item to your monthly budget. (As with any mortgage you must meet your loan obligations, such as keeping current with property taxes, homeowners insurance, and home maintenance.)
Have a withdrawal plan in place
A withdrawal plan determines how much money you take out of your retirement accounts each year to ensure your savings last — and connecting with a trusted financial professional is a great first step.
Perhaps the biggest contributing factor to the longevity of your portfolio is the withdrawal rate. When developing your plan, in conjunction with a financial professional, consider:
- How much you plan on taking out annually.
- Deferral and state tax implications.
- The percentage of total funds withdrawn annually.
- Whether you will have assets to continue investing.
If you are unsure how often or how much you will need to withdraw, a reverse mortgage could provide an alternative source of income-tax free6 cash flow while protecting and preserving your portfolio.
Defer Social Security benefits
For 50% of seniors, Social Security benefits are half of their income, and for 1 in 4 seniors, it that number jumps to 90%.7 While many opt to start drawing Social Security at age 62, delaying benefits can significantly increase your monthly payment.6
If you delay benefits until full retirement age (66 or 67 for most), your check could be bigger. If you delay until the maximum age of 70, you will get the biggest check possible, increasing payments by 8% annually.8
If you’re planning to delay Social Security to maximize your monthly benefit, but need additional cash now, a reverse mortgage may be a useful strategy. By using reverse mortgage proceeds to cover everyday living expenses, you may be able to postpone claiming Social Security — allowing your benefit to grow over time and potentially increase your long-term retirement income.
As with any financial decision, it’s important to review your options with a financial professional and consult the Social Security Administration to determine what approach best fits your unique needs and goals in retirement.
Plan where you’ll live
Where you retire can have a significant impact on your expenses. If your goal is to age in place, using funds from a reverse mortgage to help cover healthcare expenses (like in-home care) or make home modifications or upgrades can help ensure you stay in your home as long as possible.9
Alternatively, you may consider downsizing to a smaller home, relocating to an area with a lower cost of living, or moving closer to family. Reverse for purchase financing (also known as a HECM for Purchase) could be a solution! This option allows you to use a reverse mortgage to purchase a new home without monthly mortgage payments.9
Here’s how reverse for purchase financing works:
- You make an initial down payment using proceeds from the sale of your current home, savings, or available cash.
- The remaining balance of the purchase price is then covered by your reverse mortgage loan proceeds.
- Any additional funds left over can be used at your discretion.
Whether staying put or starting fresh, a reverse mortgage can help align your housing choice with your retirement goals.
Reverse Mortgage FAQs
Q: What is a reverse mortgage and how does it help with retirement?
A: A reverse mortgage is a loan for homeowners 62 and older that allows them to convert a portion of their home equity into cash without monthly mortgage payments.9 It can improve cash flow, fund healthcare costs, or consolidate existing debt.
Q: Can I use a reverse mortgage to buy a new home?
A: Yes, the reverse for purchase financing allows seniors to buy a new primary residence using loan proceeds and a down payment, without the requirement of monthly mortgage payments.9
Q: Is Social Security enough to live on in retirement?
A: For most people, Social Security alone is not enough, as it typically replaces only about 40% of pre-retirement income.10 It is best used as a supplement to other savings, investments, and retirement plans.6
Secure your financial future
As you prepare for or navigate retirement, considering and implementing these steps can help ensure you have the funds needed to enjoy a comfortable lifestyle. And it’s never too late to make a change! If your retirement portfolio is not quite where you would like it to be, a reverse mortgage could help improve your monthly cash flow and overall financial flexibility.
See why more than a million Americans have already made a reverse mortgage part of their financial plan.11 Contact the Longbridge team today to explore your options.