Create a retirement plan that makes the most of what you have!
More than half of Americans (52%) aren’t financially prepared for retirement, lacking the necessary income to maintain their pre-retirement standard of living.
In fact, Americans’ financial preparedness has improved only slightly since 2010, despite gains in the economy, according to a recent report by the Center for Retirement Research at Boston College.
That study, based on the National Retirement Risk Index (NRRI), shows the share of working-age households who are “at risk” of being unable to maintain their current lifestyle in retirement.
And its findings are a wake-up call for retirees.
“Our expectation was that the NRRI would improve sharply in 2013; it certainly felt like a better year than 2010,” the researchers note. “… But the ratio of wealth to income had not bounced back from the financial crisis, more households faced a higher Social Security Full Retirement Age, and the government had tightened up on the percentage of housing equity that borrowers could extract through a reverse mortgage.”
These factors, among others, have impacted Americans’ replacement rates — retirement income as a percentage of pre-retirement income — that allow them to maintain their living standard without falling short.
So how might you better prepare for your own retirement? These five steps might improve your retirement plan:
1. Purchase an Annuity
Annuities can be a source of dependable income during your post-career days. Essentially, they are contracts with an insurance company in which you pay a premium or a series of premiums, then receive payments at regular intervals for a specific period of time.
Annuities can be divided into four categories:
- Fixed — annuity payments are the same every month
- Variable — annuity payments vary with investment returns
- Immediate — annuity payments begin immediately
- Deferred — annuity payments begin at a specified date in the future
If seeking guaranteed income, many financial planners suggest retirees consider fixed annuities, as their payouts don’t rely on underlying investments like variable annuities do.
2. Delay Claiming Social Security
At age 62, when you can begin drawing from Social Security, you can access only 75% of your benefits.
If you have reached what’s called “full” or “normal” retirement age, which is 66 for people who were born between 1943 and 1959, you can access 100% of your benefits. (If you were born in 1960 or later, your full retirement age is 67.)
For each year after that, up to age 70, your benefits increase 8%, meaning you can access 108% of your benefits at age 67, 116% at age 68, 124% at age 69 and 132% at age 70.
Collecting early versus collecting late could translate to a 76% difference in your monthly income, experts say.
3. Consider a Reverse Mortgage
Most Americans approach retirement with housing plans — whether upgrading, downsizing or simply aging in place. But many don’t know how a reverse mortgage can fit into those plans.
A reverse mortgage is a loan that converts some of your home equity into cash flow. A HECM, or a Home Equity Conversion Mortgage, is a reverse mortgage insured by the Federal Housing Administration. It is the most common reverse mortgage.
If you plan to move, you should consider a HECM for Purchase, which allows those who qualify for a reverse mortgage to use it to buy a new home in retirement while eliminating mortgage payments.
A HECM for Purchase allows seniors age 62 or older to purchase a new primary residence using loan proceeds from the reverse mortgage. To do so, you must have a down payment large enough to pay the difference between the HECM proceeds and the sale price, plus closing costs for the property you are purchasing.
If you are downsizing, you may be able to generate enough money from the sale of your previous home to pay for this down payment.
On the other hand, if you plan to stay at home and age in place, use the proceeds from a reverse mortgage to renovate your home to make it more aging-friendly.
4, Open a Health Savings Account
Today, health care costs for retirees average more than $9,000 annually, according to Ameriprise Financial. Based on the average life expectancy in the U.S. (78.8 years), that means you could pay more than $124,000 in today’s dollars if you retire at age 65.
It’s hard to know what the cost of health care is going to be down the road, so to guard against any unknown expenses, open a health savings account (HSA), which is made to cover medical expenses both before and during retirement.
Along with not having to stress about health care costs during retirement, HSAs also offer three tax benefits:
- You can deduct the amount you’re contributing to the HSA on your tax return.
- Funds within your HSA can grow tax-free.
- Contributions and withdrawals are not federally taxed, as long as you use the account for qualified medical expenses, as described by the IRS.
In order to fund an HSA, you must be covered by a high-deductible health plan that meets certain requirements for deductibles and out-of-pocket expense limits.
Research eligible expenses before taking any funds out of the account, because distributions not used for qualified expenses can be included in gross income and, for those under age 65, are subject to an additional 10% tax.
5. Plan Ahead
Above all else, have a plan. Consulting a financial advisor or retirement planner years prior to retirement can increase your likelihood of successfully transitioning into your “golden years.”
Ideally, you should seek advice 10 years before retiring. However, doing so five years prior would be realistic and would still allow time for financial planning. The more time left before retiring, the better.
Search for a financial advisor now to start the planning process.
