Advisors help clients plan for retirement, providing the best strategy on overall income inputs: Social Security, savings, 401(k)s and pensions. But what happens when these funds still aren’t enough to cover retirees’ costs?
Steve Vernon, author and scholar with the Stanford Center on Longevity, outlined several steps advisors can recommend to clients to help bring down their expenses, in a recent interview with ThinkAdvisor.
“Once [clients] have a picture of their total income, then they can say, ‘Here’s how I need to bring my living expenses down.’ Too often people use their 401(k) accounts like a checking account rather than have a paycheck generating strategy,” Vernon said.
“So once they get the idea of what a lifetime paycheck will be from Social Security, a pension, 401(k), then that shows a target on how to spend the income.”
He says that people have “just run out of money” in their late 70s and early 80s, thus decisions on how to curb spending should happen before that. But where should they cut?
“I hold planning workshops and hear people who say, ‘I’ll go to Starbucks less often or I’ll cut out cable.’ But if they have a big gap, they’ve got to look at big targets, and housing is still the largest expense for most people in retirement,” Vernon said.
He cites a Boston College Center for Retirement Research study that shows about three-quarters of older people had more wealth in their home than in their IRAs and 401(k)s.
Once a family is raised and gone, and a client is retired, “I’m a big advocate of at least taking a good, hard look at the house and community [that clients] live in, and make those changes,” he said.
By selling their home, they can realize the capital gain, downsize to a less expensive home and “deploy the net proceeds to generate retirement income,” he explained.
Vernon adds that by “relocating, retirees might also achieve other goals, such as moving to a home or neighborhood that will be more supportive in their later years.”
This also should be done when a client is transitioning into or just after retirement, when they still have the vitality to make the move, as in their early 80s, they may be too frail, he notes.
2. Look into a reverse mortgages
Reverse mortgages also should be reviewed as an option.
“Some advisors are absolutely opposed to reverse mortgages because of their poor reputation,” Vernon said, adding that he agrees they should be a “tool of last resort but shouldn’t be ruled out automatically.”
Another option is to pay off the mortgage. ”This definitely reduces expenses in retirement,” he explained.
3. Get a part-time job
Perhaps not a first choice for those who want to retire full time, but an option Vernon mentions, is looking at part-time worth. This not only aids in bringing in extra money, it allows clients to delay collecting Social Security or withdrawing from savings.
4. Set up an annuity
Vernon notes that while advisors may have the same general impression of annuities as they do of reverse mortgages, and “won’t even talk about them, for me it’s another tool” — a tool that can kick in at a certain time in retirement that can make up for cash shortfalls.
A fixed annuity, he said, “is like a personal pension in that it pays a monthly check for the rest of [the client's] life.” However, “it is only needed for people who need more guaranteed income than would be provided by Social Security.”
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