Mitch Reiner, CFP managing partner and senior investment advisor at Capital Investment Advisors in Atlanta. He is a contributor to the recent book What the Happiest Retirees Know: 10 Habits for a Healthy, Secure, and Joyful Life. YourWealth.com
There is no good time to endure a major financial setback, but in or near retirement is an especially bad time. Whether it is medical bills, divorce, needy adult children, soured investments or something else entirely, the closer you are to retirement, the less time there is to recover.
Unfortunately, many retirees and near-retirees are finding themselves in this predicament. Since the 1990s, the divorce rate has doubled among adults age 50 and older…while the debt burden shouldered by Americans over age 70 has increased by more than 500% from 1999 through 2019. And in the past few years, the pandemic has led millions of Americans to retire earlier—and with less savings—than they had planned. Adding to that, nearly half of parents with adult children provided financial support to those kids during the pandemic.
Trimming expenses and curtailing travel plans could be enough to overcome modest financial challenges. But more dramatic solutions often are required for major setbacks on or near retirement. Some good news: Several of these solutions are especially likely to be effective in 2022…
Your home and car are valuable assets…and major expenses. Among the ways they could help you dig out from a retirement financial hole…
Sell your home. It’s a great time to do this—the typical US home has surged nearly 50% in value during the past six years. Example: If you sell a $500,000 home and move into a $200,000 condo, you’ll free up $300,000 to pay off debts. And you may not owe any federal income tax on your gain due to the home-sale exclusion—gain on the sale of a principal residence up to $250,000, or $500,000 for joint filers, is not included in income if you’ve owned and used the home at least two of the five years preceding the date of sale. Or that extra cash can be invested and used as a source of retirement income—with a typical 4% annual withdrawal rate, $300,000 can generate income of $1,000 per month.
Selling the home is only half the upside—you’ll also dramatically trim a wide range of bills, including property taxes, homeowner’s insurance, utilities and maintenance. These savings can add up to many thousands of dollars per year.
Relocate to near one of your adult children. If you live in a high-cost part of the country, you probably know that moving somewhere less expensive could dramatically trim your budget—living in certain coastal cities such as San Francisco, Seattle or Boston costs essentially twice as much as living in noncoastal cities like Cincinnati, St. Louis or Tucson. But moving away from your friends and family might be a greater sacrifice than you’re willing to make.
Possible compromise: Relocate to a part of the country where one of your grown children lives. Research suggests that living near an adult child with whom you get along is both a money saver and among the most effective ways to boost happiness in retirement. The savings are greatest if the adult child lives in a low-cost area…but as long as he/she doesn’t live in a very pricey place, you’re likely to come out ahead. Why? Retirees who live near their kids tend to spend less money eating out and traveling and more time socializing inexpensively with family. These retirees also find it easier to downsize to one-bedroom condos—when other family members visit, they can stay at the adult child’s home.
Even greater savings are possible when retirees move in with their adult kids. That’s a drastic life change that isn’t appropriate for every family, but for some it’s win-win—perhaps the retiree can save on housing costs, while the adult child saves on childcare costs if the retiree is able to babysit grandkids.
Investigate property tax savings for seniors. If you decide not to sell your home, enter your state and the phrase “property tax relief” into a search engine—there might be a program to reduce older homeowners’ tax burden. Some programs are available only to low-income homeowners age 65 and up, but others have no income restrictions and/or are available before age 65—Washington State’s is available to homeowners as young as 61, for example.
Sell a car. Retired couples often can get by with just one car. Having fewer cars than drivers may cause occasional inconveniences and necessitate some Uber rides, but the upside can be significant. Eliminating a car could save you thousands of dollars in insurance, vehicle registration and maintenance bills…and the car might sell for more than you expect these days—used-car prices soared by around 25% during the pandemic. The average price of a used car recently topped $25,000, though this varies by vehicle.
Be extremely cautious about borrowing against the value of your home. A “cash out refinance” or home-equity line of credit might seem like a smart way to tap home equity without having to move, but research has shown that the more a retiree owes on his/her home, the less happy he is likely to be—big debts trigger tremendous insecurity in retirement. Selling the home and downsizing might be emotionally difficult in the short term but the better long-term choice financially and psychologically.
If you can’t bring yourself to sell, a reverse mortgage may be a way to tap home equity without moving out of the home. A reverse mortgage is a type of home loan available to homeowners age 62 and older. It requires no monthly payments—interest charges are added to the loan balance, which typically is paid off by selling the home after it’s no longer the borrower’s primary residence. Reverse-mortgage costs and fees can be significant, however, and this likely won’t free up as much cash or create as much flexibility as downsizing. If you select this option despite those limitations, compare quotes from at least three local banks, credit unions and/or mortgage brokers before proceeding.
Cutting costs and selling assets aren’t your only options—even in retirement you may be able to increase your income…
Take a retirement job. If you haven’t yet retired, postponing your retirement date is an obvious option. If you’ve been retired for years, returning to the workplace could be daunting—but this is an excellent time to do it. Many employers are anxious to hire any qualified applicants these days.
Or you could work part-time—two or three days a week might be sufficient. Remote work is a realistic option these days. And you don’t even have to do something that feels like work—if you didn’t enjoy your former career, consider what you enjoy doing and look for a job doing that. Example: A 90-year-old Georgia woman works in a botanical garden. If she wasn’t doing that, she would be doing virtually the same work in her own garden.
Delay or suspend Social Security benefits if possible. Not taking Social Security benefits might seem like a counterintuitive strategy for a retiree struggling with a financial problem—and, indeed, if you cannot pay your bills without these benefits, you should claim them. But if you can manage to pay your bills without Social Security for a few more years, doing so could be a solution. Every year that you delay claiming your Social Security benefits from age 62 until 70 increases the size of your benefit. Example: If your benefit is $1,500 per month at your “full retirement age” of 66, you would receive $1,125 if you start your benefit at 62…but $1,980 if you wait until 70. Your Social Security benefits will continue as long as you’re alive, so locking in the largest possible benefit is a prudent way to reduce the fear that you will outlive your money.
If you’ve started your Social Security benefits: You can suspend them at any point after you reach your full retirement age, between 66 and 67 depending on your year of birth. For those born in 1943 or later, each month your benefits remain suspended up until age 70 will increase your future benefits by two-thirds of 1%, which comes to an 8% increase per year. There is no upside to postponing or suspending benefits beyond age 70. Note: Deciding when to start and whether to suspend Social Security benefits can be more complicated for married couples. Speak with a financial planner for details.
If you’ve returned to the workforce, there’s another advantage to delaying or suspending your Social Security benefits—it reduces the odds that you’ll have to pay back a portion of these benefits as income tax. The taxation of benefits begins at incomes as low as $25,000, or $32,000 for married couples filing joint returns—thresholds you’re likely to exceed if you’re earning a paycheck.
Don’t get overly aggressive with your retirement investments. Some retirees might be tempted to shift their sluggish fixed-income investments into stocks. Don’t do it—a stock market rout could devastate an equity-heavy retirement portfolio. Minor modifications to a retiree’s portfolio might be reasonable—perhaps you’re willing to take the risks involved in switching from a 70/30 fixed-income/equity retirement allocation to 60/40, for example…or maybe it’s worth switching a portion of your low-yielding bonds to low-risk dividend-paying equities. Anything more than that is playing roulette with your retirement.