Retirement can be a great time of life, but financial uncertainty is especially hard in this phase.
If income is tight, every decision you make now counts. The current volatile stock market and low-interest-rate environment both are weighing on retirees’ financial decisions. How can you ride out this time of uncertainty?
Here are a handful of things you can do to increase your financial safety and stability in this uncertain time.
1. Use your 2020 RMD waiver
If you are 72 or older, you typically must withdraw a minimum sum — a “required minimum distribution” — from your retirement accounts each year so you can pay income tax on it.
But recent federal legislation known as the CARES Act has waived the RMD requirement for 2020.
Here’s what that means: You can leave your RMD amounts in their accounts this year, which keeps the money working for you. You won’t be forced to withdraw it when market values are down. Also, if you leave it untouched this year, you will not have to pay income tax on it.
The RMD waiver is one of “5 Ways the New Coronavirus Stimulus Law Will Help Your Wallet.”
2. Evaluate when to claim Social Security
If the current financial turmoil and pandemic have affected your livelihood and you are at least 62 years old, you may wonder whether it’s worthwhile to quit work and start collecting Social Security.
You probably already know that there are powerful reasons for waiting. In fact, unless you expect to have a shorter than normal lifespan, there are real benefits to delaying claiming Social Security until age 70. Retirement expert Russell Settle recently discussed this issue in “Does It Really Matter When I Claim Social Security Benefits?”
But, for some folks, collecting as soon as possible can be the right answer. The question is: Is it the right move for you?
Here’s how to weigh the decision:
- Collect information: How much money will you need in retirement and where will you get it?
- Understand your current spending in detail — not just monthly costs but also expenses that arise occasionally or annually. This is the basis for knowing how much you’ll need in retirement.
- Figure out your sources of retirement income, including Social Security. You can find tips for doing this in “7 Things You Should Do Before Claiming Social Security.”
- Plan for inflation, which can bite into your purchasing power. Pencil in medical expenses in old age, too.
If your costs will exceed your retirement income, something’s got to give. If you can’t make up the shortfall easily, you may need to wait to take Social Security.
Here’s why: Although the average benefit paid in 2020 is $1,503 per month, waiting to claim after age 66 (full retirement age) grows your benefits by 8% each year, according to the Social Security Administration.
Need help deciding when to claim your benefit? Money Talks News partner Social Security Choices offers a low-cost, personalized analysis of various claiming strategies.
3. Hold off on retiring
If you have a job or can get one, try to hang on at work a bit longer.
If you’re in the labor force after age 65, you won’t be alone. In 2018, Americans told Gallup pollsters that they expected, on average, to retire at 66. That’s six years later than Americans’ pre-retirement expectations were in 1995.
The money you make now not only pays bills, it helps you leave retirement savings untouched. Postponing retirement gives you some breathing room and flexibility to:
- Decide how you’ll respond to this year’s changing events.
- Gauge how persistent the downturn may be.
- Assess what the damage, if any, has been to your retirement savings.
4. Beware your hopes and dreams
Seniors need to be careful not to get snared by scams, fraud and get-rich-quick “opportunities.”
Scammers often specialize in robbing older people. Seniors are a tasty target in part because many of them have a lifetime of savings amassed.
Seniors can’t afford to make financial errors. They don’t have the time to make up the damage to their standard of living. So, it’s smart to be wary.
How to inoculate yourself? If you are offered an opportunity that sounds too good to be true, talk it over with trusted family members, friends or financial advisers. Check out the Justice Department’s Financial Fraud Enforcement Task Force resources for ways to report and investigate possible financial fraud.
5. Think carefully about getting a divorce
The divorce rate has skyrocketed for Americans aged 65 and older, roughly tripling since 1990, according to Pew Research Center’s latest numbers.
Divorce typically is costly in any time of life. Average total divorce costs are about $12,900, a Nolo survey found.
For retirees, the financial impact of divorce can be dire because there’s so little time to recoup losses, Washington Post retirement columnist Michelle Singletary writes. Financial difficulties related to divorce may include:
- Living on half of your previous income and resources.
- Being forced to sell the family home.
- Liquidating and splitting up retirement accounts.
This is not to suggest that anyone stay in a marriage that is miserable or abusive. It is, rather, to emphasize the importance of being realistic about the potential costs and losses and to urge weighing the pros and cons deliberately.
If you expect to divorce, take steps immediately to protect your finances.
6. Weigh reverse mortgage pros and cons
Money Talks News founder Stacy Johnson has noted that reverse mortgages are not right for everyone. What exactly is a reverse mortgage? Stacy explains:
“A reverse mortgage is simply a mortgage: You’re borrowing money against your house. What makes a reverse mortgage different is that, instead of paying every month on your mortgage, you’re getting money every month. You could also be taking money out as a lump sum, or using the mortgage to establish a line of credit.
In any case, a reverse mortgage is like any mortgage: You’re borrowing against your house.”
If you are out of money and you’ve eliminated other options, a reverse mortgage can be helpful. But it is an expensive way to borrow money. Your mortgage loan grows bigger, not smaller as a mortgage balance typically does over time. There are other potential fees and interest costs involved, too.
Before signing up for a reverse mortgage, explore the many good alternatives. And understand this product well before you buy. The Consumer Financial Protection Bureau explains the costs of a reverse mortgage in detail.
7. Calculate your safe withdrawal rate
Before you start spending retirement savings, ask yourself how much money can you withdraw annually without running out of money before you die.
Zeroing in on this number is not easy. But experts often suggest using the “4% rule” to estimate how long your money will last. The idea, used by many financial planners and others, is to withdraw 4% of your savings in your first year of retirement and then adjust that amount by inflation each year thereafter.
Doing so should help to prevent you from running out of money before you run out of life.
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