As the American population continues to age, there is an increased and renewed focus on retirement planning. And for good reason—every day, an estimated 10,000 Americans turn 651, and this pace is expected to continue for years to come.
What’s more, as the average life expectancy continues to grow—having reached nearly 80 years in 20192—financial planning today encompasses much more than it had in previous generations. And while it would be really convenient if there were a single best retirement strategy that could be easily applicable to everyone, this simply is not the case.
The reality is that when it comes to a retirement that is both enjoyable and financially secure, a lot depends on how much you already have saved. Unfortunately, for many, these savings are negligible. As a matter of fact, a recent study found that about 21% of Americans have no retirement savings at all, while about two-thirds have just less than $5,0003—yikes!
But this doesn’t have to be the case. Preparing for retirement should be as proactive as possible – starting with a plan to help you get there. The ultimate goal is to be as far ahead of the curve as possible, so that variables like major life events or even market volatility as we’ve seen recently, do not disrupt or undermine your financial security.
Whether you’re just beginning to develop your retirement plan or already have one in place, when it comes to finances – you can never be too thorough. Consider the following strategies for a smart retirement plan.
Estimate your retirement expenses.
The best place to start in preparing a retirement plan is 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. The key word here is realistic—as one of the biggest retirement mistakes people make is underestimating their expenses. Start with some of the easy-to-predict expenses—such as your housing, electricity, and other utilities. From there, you can work toward the costs that are more likely to fluctuate over time. And remember, your expenses are based on your lifestyle, so be sure to take your travel plans, gifting habits, and hobbies into consideration, too.
Budget potential healthcare costs.
While we’re on the topic of expenses—let’s talk healthcare. While Medicare will pay some of your expenses as you age, the reality is that premiums are only expected to increase, and a severe health challenge or condition could create a lot of out-of-pocket costs. As a matter of fact, an estimate from HealthView Services suggests that the average healthy 65-year-old couple looking to retire this year will spend nearly $390,000 on healthcare in retirement4—on Medicare, supplemental insurance policies, and other various out-of-pocket costs. In looking to protect your retirement nest egg, consider opting for long-term care insurance, which can help with expenses not covered by Medicare. Buying coverage proactively before such a need arises will result in a lower premium and mitigate the risk of being rejected later on by insurers.
Build up your emergency fund.
Do you have 3-6 months’ worth of basic living expenses prepared in a savings or checking account? If you don’t, you’re not alone—more than 40% of households do not have the funds to cover a $400 expense5, much less an emergency fund to cover months at a time. Before you can even consider putting money away for retirement, it’s imperative that you make sure you have an emergency fund you can readily tap into in the event of a large, unexpected expense or a delay in income. A Home Equity Conversion Mortgage (HECM) —also known as a reverse mortgage—lets you do exactly that. By tapping into your home equity, not only can you pay off an existing mortgage, but you can also use the remaining proceeds to establish a line of credit, as a “safety net” for later use if needed. Learn more here.
And whether you call it an emergency fund, “safety net,” or “rainy day” fund, it’s important to note that such savings are not the same as a retirement account. Early withdrawals from retirement accounts often come with hefty fines, so you’ll want a separate emergency fund specifically to cover those unexpected and typically costly life events.
Downsize your debt.
Before you retire, you should aim to retire as much debt as possible, too. Easier said than done, right? But just consider this—a recent survey found that 40% of retirees report that paying off debt is a financial priority—and of those with mortgage debt, 9% owe more than $100,0006. Taking proactive measures to reduce and manage debt minimizes the amount of retirement income you will have to spend on interest payments.
Not sure where to begin? Due to high rates and revolving balances, you’ll want to start by addressing any credit card debt you have. From there, focus on debts with fixed rates and payments such as a mortgage or vehicle loan. Since these types of debt are more predictable, they can be easily calculated into your retirement budget. Nevertheless, making payments now means one less expense come retirement.
If you don’t have enough money to cover minimum monthly payments or pay off existing debt, a reverse mortgage is a smart solution. Available to homeowners ages 62 and older, a reverse mortgage allows you to access loan proceeds to pay off an existing mortgage. And the remaining funds could be used as you wish – including to pay off other debts. Learn more about a reverse mortgage here.
Have a withdrawal plan in place.
When it comes to the longevity of your retirement portfolio, perhaps the biggest contributing factor is the withdrawal rate—nobody wants to outlive their funds. Having said that, a smart retirement plan should include a withdrawal plan. Planning your withdrawal frequency not only ensures you have the funds needed to last throughout your retirement, but also keeps you from having to pay excessive taxes.
When developing your withdrawal plan, consider factors such as how much you plan on taking out of your retirement funds each year, the deferral and state tax implications for taking money out of these accounts, and the percentage of total funds you anticipate withdrawing annually. You’ll also want to assess whether or not you’ll have the assets and funds to continue investing, and, consequently, earning passive income throughout the year.
And if you’re not sure how often or how much you’ll need to withdraw, a reverse mortgage could provide an alternative source of cash flow. With a line of credit available, loan proceeds provide a tax-free “safety net,” thus allowing you to keep portfolio assets in place.
Defer Social Security benefits.
On average, Social Security provides a third of retirement income for retirees7. And while it’s likely to be a major source of income for your own retirement, it may offer less than you expected. The reality is that Social Security benefits alone may not be enough to support your retirement—but there are ways to maximize these benefits.
For instance, while many people opt to start drawing Social Security right away at age 62, it’s important to keep in mind that when you start collecting Social Security benefits will ultimately affect how much you receive. If you delay benefits until full retirement age (66 or 67 for most), your monthly Social Security check could be bigger. Better yet, if you can delay benefits until the maximum age of 70, you’ll get the biggest check possible, increasing payments by 8% annually8.
Plan where you will live.
It’s no secret that where you retire can have a significant impact on your expenses. And when it comes to your ideal retirement home, you have many options. For instance, if you currently live in a large home, you may consider opting to relocate to a smaller one that is more financially manageable or in an area where the cost of living and taxes are lower. You may also choose to relocate to a warmer climate or a condo that’s closer to family, friends, and loved ones. Whatever the reason, changing residences come retirement could free up some additional funds to add to your nest egg. And a HECM for Purchase could help you purchase your retirement dream home without monthly mortgage payments*.
If you’re not willing to relocate or sell your home, but still need an additional source of retirement income, a reverse mortgage could be just the solution. By tapping into your home equity, you can get cash from a reverse mortgage to supplement your income, cover healthcare expenses, make modifications and updates to your existing home, or even take a trip. Check out our reverse mortgage calculator to see how much you could qualify to receive.
As you near and/or enter those long-awaited retirement years, now is not the time to coast. Considering and implementing these steps for a smart retirement plan will only help ensure that you have all the funds you need to enjoy a comfortable retirement lifestyle.
And if your retirement portfolio and savings are not quite where you’d like them to be, loan proceeds from a reverse mortgage can improve your income and monthly cash flow. Available to homeowners age 62 and older, a reverse mortgage lets you access a portion of the equity in your home to use as you wish. Better yet, there are no monthly mortgage payments required and you’ll never be required to repay more than what the home is worth.
*Real estate taxes, homeowners insurance, and property maintenance required.
9 Source: 2010 NRMLA study.