Dismal State of Retirement: How to Turn Lemons into Lemonade

Dismal State of Retirement: How to Turn Lemons into Lemonade
retirement planning
Is it possible to make retirement lemonade out of retirement lemons?

The retirement outlook has changed drastically since your grandparents, and even parents, retired.  In fact, by some measures, retirement might seem as sour as lemons.

Some of the bad news is obvious: we have just weathered an immense recession that impacted finances from all angles. And it has changed in some less obvious ways, as well.

Washington, D.C. think tank the Brookings Institution recently pointed to 10 “Economic Facts about Financial Well-Being In Retirement,” in a report by The Hamilton Project.

While there is some good news, the report finds that retirement “well being” might not be going very “well.”

Here are the 10 — mostly sour — economic facts discovered by The Hamilton Project:

1. Not Enough Money

Only half of non retired American adults expect to have enough money to live comfortably in retirement.

2. Longer Lives (Good News / Bad News)

Americans are living longer: More than three out of five 65-year-olds today will reach age 80, a marked increase from 50 years ago.  While this is overall good news, it does mean that you need more in retirement savings to cover additional years in retirement.

3. Higher Out of Pocket Healthcare Expenses

Around one-half of American seniors will pay out-of-pocket expenses for long-term services and supports, such as nursing home facilities or home-based health care.

4. Pensions Have Gone Away

In 1978 two-thirds of dedicated retirement assets were held in traditional pensions; by contrast, only one-third are today.

5. Wealth is in Homes Not Just Banks

Middle-class households near retirement age have about as much wealth in their homes as they do in their retirement accounts.

6. Wealth Disparity

Among households near retirement age, those in the top half of the net worth distribution had more wealth in 2013 than their counterparts did in 1989, while those in the bottom half had less wealth.

7. Home Equity is Important

Home equity is a very important source of net worth to all but the wealthiest households near retirement age.

8. Financial IQ is Low

Basic financial concepts are not well understood by many Americans.

9. Less People Are Contributing to Social Security

The ratio of current workers to current Social Security beneficiaries is half what it was in 1960.

10. The Government Wants You to Save

Federal tax breaks to incentivize retirement saving totaled nearly $100 billion in 2014.


How to Make Retirement Lemonade Out of Retirement Lemons

Many of the report’s findings identify hardships that future retirees will face.

However, there are some bright spots in the study and there is a lot that anyone near retirement can do to improve their retirement security and create the best retirement plan possible.

Here are some ideas for making retirement lemonade out of retirement lemons:

Tap Your Home Equity:  There are two findings about home ownership that could be a silver lining of opportunity for retirees worried about having enough money for retirement.

According to the research, “Even among households nearing retirement age, much of networth (i.e., total assets minus total liabilities) is held outside dedicated retirement accounts…over the past quarter century the largest single source of wealth for all but the richest households nearing retirement age has been their homes, which accounted for about two-fifths of net worth in the early 1990s and accounts for about one-third today.”

Given that so much of Americans’ wealth is tied up in their homes, it would stand to reason that this will be a resource to them in retirement. However, seldom do retirees view their home equity as a source of cash flow—even though there are tools to convert that home equity to make it liquid.

“Home equity is an important source of wealth for middle income households, accounting for more than one-third of total net worth for the second, third, and fourth quintiles of the net worth distribution,” the report states. “However, housing wealth is not a liquid asset, and homeowners rarely access home equity during retirement through financial products such as reverse mortgages or home equity lines of credit.”

In fact, fewer than 2% of those eligible for a reverse mortgage are taking advantage of one today.  Other ways to release home equity include: downsizing and home equity loans.  The NewRetirement Retirement Calculator enables you to assess and compare ways to tap hour home equity for retirement.

Make Trade Offs:  Delaying the start of retirement by working longer and waiting to start Social Security benefits until your maximum retirement age are two really effective ways to make up for not having saved enough money.

The really good news about working longer is that people who work tend to be happier and healthier than their fully retired counterparts.

And, since we are living longer lives, you will still have quite a few years to enjoy retirement.

If that does not appeal to you, then you will need to think about tapping home equity (see above) or figure out other ways to spend less.

There are people who live frugal but meaningful lives on Social Security income alone.  And, if you have waited to start Social Security, then you have a significantly bigger monthly paycheck.

So, if you have not saved enough, the trade off is work longer or live on less.

Get Help with Personal Finance:  The research indicates that most people — across all  socioeconomic statuses — do not have a great understanding of personal finance.

The reality has been that most of us have lived month to month or year to year — making due with what we earn.  The problem is that these financial habits become problematic when we are no longer earning money.  Instead of figuring out if you are making ends meet this week, month or year… you are supposed to figure out how to pay for the rest of your life with a fixed amount of resources.

Working with a financial advisor can help you.  Online resources are another way to bolster your understanding of financial concepts.  The NewRetirement Retirement Calculator is a unique tool that let’s you discover which financial strategies will work for you.  It does not tell you what to do, but lets you “try on” different ideas and immediately see what impact they have on your finances —  now and into your future.

Stay Healthy and Optimize Health Insurance:  Healthcare costs have skyrocketed and they continue to go up.  There are two ways you can combat these costs:

  • Stay healthy — Taking care of yourself, eating right and exercising will make you happier and healthier —  it might also save you money on health expenditures.
  • Buy the right supplemental insurance —  Medicare does not cover all health costs.  Many retirees buy Supplemental Medicare policies which can reduce your out of pocket healthcare spending.  However, what is covered by each policy varies widely.  It is a good idea to shop and compare your policy every year to make sure you have the right coverage for what you need as both your health and the policies evolve.

Buy Your Own Pension: If you are lucky enough to have some retirement savings, you might want to consider buying an annuity.  An annuity is like a pension you buy yourself.  A lifetime annuity enables you to buy monthly income for the rest of your life — no matter how long that turns out to be.

Annuities give you predictable income for your lifetime.  Find out how much income you can buy with the annuity calculator or you can use the to “try on” an annuity (and dozens of other retirement strategies) by using the NewRetirement Retirement Calculator.

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