A Look at Retirement Investing

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Many individuals who are retired are considering shifting their investments around due to many different reasons:  fear of an unstable stock market, selling a home, moving to a retirement center, or spending more than is in a 401(k).  How each fear is looked at depends on several different factors such as savings, monthly income from other sources, and current age.

Top Retirement Concerns

A recent study conducted by Northwestern found that the top retirement concerns include:

  • Having an unplanned emergency – 38%
  • Having unplanned medical expenses due to illness – 34%
  • Having insufficient savings to retire – 32%
  • Outliving retirement savings – 21%
  • Becoming a financial burden 20%
  • Inability to afford healthcare – 18%
  • Identify theft – 16%
  • Poor credit – 12%
  • Having to claim bankruptcy – 6%

Anxiety and Retirement

The top anxiety producing thought about retirement is having an unplanned emergency which could be devastating to a financial situation.  Since there is no way to know the future, spending decisions during retirement is often difficult.  In order to minimize anxiety, build up a 6-month living expense fund in a safe, liquid account.  For those already in retirement, increasing the emergency savings to 36 months of spending is advisable.

The second worry about retirement was not having enough savings to retire.  Reduce anxiety over this fear by increasing the automated savings into a retirement account by 1% immediately.  Increase the amount of automated savings by 80% on the next raise and continue this increase for three years.  

Outliving retirement savings is the third major concern and entirely reasonable.  To lessen this common anxiety, use a conservative withdrawal rate of 3% to be safe.  This allows for a low-interest rate and a bear market.  Another option is a longevity annuity.  However, do a great deal of research before investing to make sure an annuity is right for your particular situation.

Some people simply do not have a choice during retirement.  Unplanned events lead to the need to live with children or relatives.  However, if a person has had a lifetime to prepare for retirement, but simply ignored the responsibility of appropriate planning, then theirs can be seen as a “failed retirement.”

Many parents trade off their retirement for their child’s college expenses.  But, by doing so, they later become a burden to their children when they could have saved for their retirement and let their children take loans out to pay for college.

Inability to afford healthcare is another major concern for potential retirees.  Since the federal healthcare system is imploding, many seniors are left wondering what will be covered for them if they have a catastrophic health event.  For those with access to a Health Savings Account (HAS), maximize the annual contributions amount and pay for current health expenses out of this account.  

Stock Market Fears

Many potential retirees are worried about an unstable stock market.  For example, a 62-year-old with $700,000 in savings is worried about a number of funds in the stock market.  Half of this savings is in cash and the other half is invested in the stock market through a Vanguard Balanced Index Fund.  If the senior has no debt or no additional income, will a $2,000 monthly expense amount necessitate cashing in some of the index funds to purchase a 5-year annuity of $1,800 a month with a deferred benefit of $2,200 a month at age 70?

While many people are nervous about the ever-fluctuating stock market, the level of risk for this particular case is not aggressive at all.  In fact, with only half of the assets allocated to stocks and bonds with the other half in cash, the risk is negligible.  In fact, some would say that not enough of the assets are invested in the stock market.  

In addition, by purchasing an annuity, the limitations on withdrawals, including no withdrawals for three years, leaves a retiree with limited options if cash is needed.  For an $1,800 a month payout for five years, the interest earned on the initial $100,000 is only $8,000.  Even in a down market, stocks usually perform better than a 1.6% return per year.

Historically, the stock market averages a 7% return on investment.  Compared to the less than 2% per year return from an annuity, in this particular case, the investor would be wise to leave things as they currently are and not deplete the amount invested in stocks and bonds.

Interest rates are expected to rise over the next few years, providing more than enough cash to last for the next 5 years.  Social Security benefits will also increase adding to the overall cash on hand amount per month.

Selling a Home or Taking a Reverse Mortgage

What are the options for a single, 70-year-old looking to move to a retirement home?  If the senior has no mortgage and owns a home valued at around $1 million with a yearly income from pensions, rental income, and Social Security of $61,000 yearly, what is the best option for the future?  Should this senior sell the home and live off the cash or keep the home and get a reverse mortgage?

First, let’s define a reverse mortgage.  A reverse mortgage is a loan product that allows homeowners age 62 or older, the ability to tap into a portion of their home equity without having to sell their home or take on a second mortgage.  With many advances in the structure of the reverse mortgage loan, this has become an attractive way for seniors to finance their retirement years.

Depending on the local tax ordinances, it seems like taking a reverse mortgage is the better option over a home equity loan.  There are several reasons to consider a reverse mortgage:

  • Reduce monthly expenses
  • Make home improvements
  • Pay for medical expenses
  • Stop foreclosure
  • Increase monthly income
  • Improve overall quality of life

Whatever the reason a person decides to obtain a reverse mortgage, they should thoroughly research this path and decide if it is right for them.

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