Retirement Planning Does Not Need to be so Scary. Create a Good Retirement Plan and Overcome Your Fears
Americans fear running out of funds in retirement even more than public speaking, suggests a recent report. So, how to overcome that fear? Should you imagine yourself in an old folks home with everyone else in their underwear (like pretending your audience is naked when you are making a speech)?
Um… no. Those images probably only enhance your fears about being financially prepared for retirement.
Taking their savings and Social Security income into consideration, a majority (69%) of investors say they are “highly” or “somewhat” confident they will have enough money to maintain their desired lifestyle throughout their retirement years, according to a recent Wells Fargo/Gallup poll.
However, nearly half (46%) are “very” or “somewhat” worried about outliving their savings, including 50% of non-retirees and 36% of retirees. Retirees who run out of money could become entirely dependent on their Social Security checks.
Besides working with a financial advisor or retirement planner, here are 5 ways to help ensure you don’t run out of money in retirement.
1. Diversify Retirement Income Streams
Tapping into a diverse portfolio is key to retirement security, says Dan Larkin, divisional sales manager with Chicago-based PERL Mortgage.
“Clearly Social Security plays a key role in thinking about retirement income, and concerns about the government’s ability to address the system’s financial problems exist for both retirees and non-retirees,” says Karen Wimbish, director of Retail Retirement at Wells Fargo, in a written statement.
Beyond Social Security concerns, the fact is that your Social Security benefit is probably not enough to meet your expenses. It can be wise to take your other assets and turn them into reliable income through annuities..
2. Consider Turning Home Equity into an Income Stream
“You need to set aside funds for retirement each month while you are working, along with building equity in your home, if you are a homeowner,” Larkin says. “Building up equity in your home is not always going to be the failsafe plan, though, as values can change. The amount you originally put down on the home and when you have purchased it may not always work for a reverse mortgage, but it certainly can help in tandem with a savings plan for the future and ultimately health care as you age.”
A reverse mortgage can benefit those who are asset rich but income poor, he says, noting the costs of health care should be figured into retirement financial planning.
“[A reverse mortgage] can help pay for the care they need as long as they are able to stay in the home while receiving the needed care,” Larkin says. “Unfortunately, if the elderly person did not save or have retirement funds to draw on or equity in a home, it truly will then fall on either the family or the government to supply care.”
3. Be Realistic About What You Are Going to Spend
As Americans continue to live longer and healthier lives, the fear of running out of funds in retirement is paramount, says Kerry Soudan with TREW Financial & Benefits Group, Inc., which has offices in Chicago’s north shore suburbs and Las Vegas, among others.
“Folks have a huge fear that they haven’t saved enough,” Soudan says. “Or, they think they saved enough and now find that they’re living longer.”
But beyond basic needs such as food and housing, soon-to-be retirees should also account for recreational spending.
“I ask, ‘What do you do on Saturday and Sunday?’” Soudan says. “When you’re in retirement, every day is like going out. And you see that people not prepared for those costs return to work.”
Looking to the future, the majority of non-retired investors expect their income to be stagnant: 56% say they do not foresee a time when “their income will be significantly higher than it is today” as compared to 42% who do foresee potential for growth in income.
Non-retirees with $100,000 or more in assets are especially pessimistic about the prospect of earning more: 61% say they do not foresee a time when their income will be significantly higher than it is today, compared with 51% of investors who have less than $100,000 in assets.
“Investors with higher assets appear to feel as if they’ve hit a ceiling. They have done well, but don’t see opportunity for continued income gains in the future,” Wimbish says.
4. Be Careful About Loans Against Your 401k
An emerging trend Soudan notes is that people are taking out loans against their 401(k) plans.
“It’s sometimes necessary for workers to borrow money from their 401(k) plan to pay for an emergency expense,” he says. “Retirement savers are generally permitted to borrow as much as 50% of their vested 401(k) balance up to $50,000. However, it’s best if you use a 401(k) loan only as a last resort.
For those under the age of 59.5, a 10% early withdrawal penalty may additionally be applied to the withdrawal. And, if you leave your job or are laid off before paying off the loan, the balance of the loan often becomes due.
5. Reduce Risk
When heading toward retirement, ensure that your investments are taking the least risk as possible he says, noting how millions of seniors were negatively impacted during the economic downturn of 2008.
“As you approach retirement, you should be putting your assets into less aggressive funds,” Soudan says.
