What do you do when you’re already retired and your savings are dwindling?
—Gerri, McKinney, TX
You can take some comfort in the fact that you are not alone. Many retirees, and those saving for retirement, suffered a huge blow when the economy tanked in 2008. In fact, the Employee Benefit Research Institute (EBRI) just published its annual Retirement Confidence Survey, which confirmed what I, and probably many of us, assumed: 1) Americans are living longer; and 2) they do not have anywhere near enough saved for retirement.
Consider these options if you need more money to cover your expenses:
Annuities. Your situation makes a good argument for annuities, which can offer guaranteed income. If you know how much income you need every month/year to live comfortably and are worried your IRA may not support that until the end of your life, you might want to look into rolling at least some of your IRA money into an annuity for protection.
Immediate annuities offer income for life, or for a set period of time, such as 10 or 20 years. When selected for lifetime income, they function like Social Security payments or corporate pension plans. This protects you from longevity risk—the chance that you may live longer than your financial resources can support you.
Be careful to distinguish between an immediate fixed annuity and an immediate variable annuity. An immediate fixed annuity provides you with a set dollar amount of income for each pay period (generally monthly), whereas the income from an immediate variable annuity fluctuates. (Read more about annuities and other retirement options here.)
Home equity. If you are a homeowner, another option is to tap home equity. Now is certainly a great time to do so since rates are still at historic lows. A home equity loan typically provides you with a one-time loan payment. Normally there is a fixed payment term (like 5 to 10 years) and a fixed dollar monthly payment. When the loan is paid off, you can apply again for another home equity loan, though you’ll have to pay set-up fees again.
A home equity line of credit provides you with a set amount of cash that can be borrowed all at once or over time as needed. The interest rate is usually variable, meaning your costs can rise or fall over time.
Some home equity loans combine the features of a home equity loan and a home equity line of credit. You can draw down a portion of the line of credit, but then lock that amount in to treat it as a home equity loan for a fixed period of time. The remainder of the line of credit remains available for future borrowing on a revolving basis.
Compared to a reverse mortgage, where the lender pays the homeowner cash in exchange for home equity, a home equity loan/line of credit is a less expensive choice in terms of upfront costs (points, closing fees, etc.). But lenders will make these loans based on your income level and credit score. So, if you are living on a fixed income, qualifying for a loan may be tough. Loan limits are also likely to be lower than they would be with a reverse mortgage.
Work (again). Of course, as a last resort you can consider getting another job, maybe in a part-time capacity and ideally doing something you enjoy. It may not have been part of your Plan A, but it’s a great way to stay active, be social, and continue contributing to your community.
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