Published on February 3, 2014
FINANCIAL ISSUES IN LATER LIFE Bill Taylor University of Wyoming Extension Community Development Area Educator April 2014
REFERENCES Barbara O’Neill, Ph.D. CFP, Rutgers Cooperative Extension; eXtensionPersonal FinancesEstate Planning at http://www.extension.org/personal_finance Financial Recovery in Later Life Catch-Up Retirement Planning Strategies for Late Savers Creating a Retirement “Paycheck” How to Make Minimum Withdrawals from Retirement Savings Plans Making the Most of IRAs and Other Tax-Deferred Retirement Savings 2
FINANCIAL RESILIENCE 3
FINANCIAL RESILIENCE is the ability to withstand economic life events, both negative and positive Loss of job Birth of grandchild Essential because nothing is static 4
FINANCIAL CHALLENGES Unemployment Job retraining often necessary Health insurance often lost COBRA provides for continuance of coverage for 18 months Expensive – 102% of full premium Only w/ employers w/ 20+ employees 5
FINANCIAL CHALLENGES (cont.) Poor/uncertain health Requires revised retirement saving analysis Adjust life expectancy & retirement savings plan contributions 6
FINANCIAL CHALLENGES (cont.) Death of spouse Possible less income Requires many decisions & adjustments Delay major decisions Place funds in CD or money mkt mutual fund until there is time to explore long-term alternatives 7
FINANCIAL CHALLENGES (cont.) Investment losses Maintain patience & longterm perspective Even at 55, you may have another 30 years of investing Limit withdrawals during mkt downturns Avoid risk of outliving assets 8
INCREASING FINANCIAL RESILIENCE Monetary resources Emergency Health savings insurance Good-paying job/retirement benefits 9
INCREASING FINANCIAL RESILIENCE (cont.) Human capital Knowledge Skills Experiences Health 10
INCREASING FINANCIAL RESILIENCE (cont.) Social capital Support support system/emotional Family Friends Co-workers Neighbors Others 11
STRATEGIES 1. Maintain a low debt-toincome ratio Consumer debt limited to 15% of monthly take-home Above 20% - in danger zone i.e. $275 debt payments divided by $2500 net pay = 11% ratio 12
STRATEGIES (cont.) 2. Maintain an emergency fund At least 3 months expenses Liquid cash – savings, money market mutual fund, shortterm CD 13
STRATEGIES (cont.) Keep skill set sharp 3. Never consider education or training finished Keep developing marketable skills 14
STRATEGIES (cont.) 4. Purchase adequate insurance Life & disability insurance Try to always have health insurance through employer, COBRA, public benefits or individual policy 15
STRATEGIES (cont.) 5. Practice good health habits Diet, weight, exercise, sleep, etc. 16
STRATEGIES (cont.) 6. Increase knowledge of financial topics Learn basic investment principles, characteristics of specific securities eXtension Investing For Your Future at www.extension.org/pages/In vesting 17
CATCH-UP STRATEGIES FOR LATE SAVERS 18
THREE PROFILES 1. 2. 3. Procrastinators – didn’t bother or had to put off building retirement fund Saving, but got late start – trying to make up time Been saving, but lost ground due to markets or emergency 19
MAKE-UP PRACTICES Can be divided into 2 basic strategies: Take action before retirement to increase savings Take action after retirement to decrease amount of savings required 20
BEFORE RETIREMENT: Saving more money Reducing expenses & saving the difference Accelerating debt repayment “Moonlight” for extra income Investing aggressively Automating investment deposits Maximizing tax-deferral opportunities Preserving lump-sum distributions by rolling into another tax-deferred savings plan 21
AFTER RETIREMENT: Trading down to smaller home Moving to less expensive location Delaying retirement Working Reverse mortgage or saleleaseback on home Tax efficient asset withdrawals 22
TRADE-OFFS Catching up requires trade- offs i.e. spending less now to have more later 23
COMBINING STRATEGIES Examples: Investing more in 401(k) & moving to less expensive location “Moonlighting” while delaying retirement Investing more aggressively & downsizing to smaller home 24
MOST EFFECTIVE CATCH-UP TECHNIQUES Working 2-3 years longer Postponing collection of Social Security until full retirement age 25
ADDITIONAL HELP Guidebook to Help Late Savers Prepare for Retirement by National Endowment for Financial Education at www.smartaboutmoney.org (type Late Savers Guidebook in search box) 26
RETIREMENT “PAYCHECK” 27
A Retirement Paycheck is income received on a regular basis after retirement. Easier to pay monthly bills Provides more financial security & peace of mind Continues monthly money management system used before retirement “Safe” withdrawal rate from retirement funds 28
“SAFE” WITHDRAWAL Withdrawal amount adjusted to reduce risk of outliving assets Inflation-adjusted withdrawal of 4% of 50% stock- 50% bond portfolio balance will generally last 30 years 29
“RETIREMENT PAYCHECK” STRATEGIES Automatic Withdrawal Plans – available w/ mutual funds, until balance is depleted Income Replacement Mutual Funds – actively managed funds w/ choice of maturity dates pay monthly income until balance is depleted 30
“RETIREMENT PAYCHECK” STRATEGIES (cont.) Bond or CD Ladder – staggered portfolio w/ different maturities; as each matures, proceeds are reinvested at longest interval 31
“RETIREMENT PAYCHECK” STRATEGIES (cont.) Regular Withdrawals from Cash Assets – set aside 3-5 year’s income in cash assets (money mkt funds, CDs, savings accounts) to ride out recessions Remainder of assets in stocks, bonds, mutual funds Cash assets replenished regularly from stocks, bonds, or mutual funds 32
“RETIREMENT PAYCHECK” STRATEGIES (cont.) Post-Retirement Age Income – continuing employment past retirement age Provides money for daily living Allows for continued deposits into retirement funds Earns higher Social Security Postpones withdrawal of retirement assets 33
“RETIREMENT PAYCHECK” STRATEGIES (cont.) Annuities Investor pays into contract w/ life insurance company and company make regular payments for investor’s life Shop for low expense fees w/ high financial stability rating 34
“RETIREMENT PAYCHECK” STRATEGIES (cont.) Reverse Mortgage – can remain in home while receiving cash Based on equity Must be 62 or older Must be primary residence No minimum credit or income requirement Can be received as lump sum, cash payments, or line of credit 35
“RETIREMENT PAYCHECK” STRATEGIES (cont.) Monthly Income Payments i.e. rent or mortgage payments Could rent out land, garage or buildings, part of residence 36
FOUR-LEGGED CHAIR “Three-legged stool” of pension, Social Security, personal savings is commonly being converted to “four-legged chair” by adding later employment. 37
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