Managing finances in retirement can be difficult for a senior, most especially if someone is already strapped for cash. That makes the possibility of regular cash flow in addition to pre-existing benefit programs very attractive, and reverse mortgages can offer some seniors a viable path toward just such a path.
This is according to a new article appearing at NerdWallet written by Certified Financial Planner and author Liz Weston.
“Your expenses don’t end when your paychecks do, but creating a reliable income stream in retirement can be tricky,” Weston writes. “The right choices can result in sustainable income for the rest of your life. The wrong choices could leave you uncomfortably short of cash.”
While the first and most prominent recommendation revolves around maximizing Social Security benefits by deferring payments until age 70, finding other sources of guaranteed income can also help achieve a senior’s retirement financing goals.
“Ideally, fixed expenses in retirement would be covered by guaranteed income, such as Social Security and pensions, so that your basic lifestyle isn’t jeopardized by stock market fluctuations,” Weston writes.
Citing finance researcher Dr. Wade Pfau, two paths that could help create more guaranteed income could be an income annuity or a reverse mortgage.
“Another option could be a reverse mortgage, a loan that can convert some of your home equity into a stream of monthly checks,” she writes. “If you have a lot of equity but still have a mortgage, a reverse mortgage could pay off your loan and eliminate those monthly payments.”
Other tips to help retirees stabilize their finances in their post-working years include leaning on traditions like the “4% rule,” which financial advisors often suggest and which involves withdrawing 4% of your portfolio in the first year, before adjusting the amount for inflation each following year. Historically, this strategy has lowered the risk of depleting finances, Weston writes.
“Some planners, however, worry that 4% may be too high given current low interest rates and high stock valuations,” she adds. “The ‘Spend Safely in Retirement’ method, which [Stanford researcher Steve] Vernon created with the help of the Society of Actuaries, recommends using annual withdrawal rates based on the IRS’ required minimum distribution rules.”
Still, creating a “retirement paycheck” is often only a first step to preparing for finances in retirement. For instance, emergency funds for unexpected expenses will still need to be allocated, and retirees are also encouraged to make plans for other necessities like long-term care in the future, Weston says.
Courtesy of Liz Weston, Nerd Wallet
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