Even Without Savings, You Still Can Improve Your Finances Before Retirement

By Chris Farrell, Next Avenue

Many people are in their 50s and early 60s when they realize that they’re financially unprepared for retirement. Of course, they knew long before that they hadn’t saved much for their retirement and that they hadn’t done any retirement planning.

What makes this moment different? Retirement is no longer an abstract concept somewhere off in the distant future, but a looming existential choice.

If that’s you, you’re far from alone. A majority of people nearing retirement really aren’t ready financially. The median 401(k)/IRA balance was $144,000 in 2019, according to the Center for Retirement Research at Boston College.

Almost 48% of American workers are not covered by a retirement plan at work, the University of Pennsylvania economist John Sabelhaus calculates in a recent research paper. People without access to an employer-sponsored retirement plan typically save little for their elder years.

How Did This Happen?

Outside the highest earners, wages in recent decades have largely stagnated for most workers after adjusting for inflation.

There are many reasons why so many near-retirees aren’t prepared, including the cost of raising a family, spells of unemployment, caring for aging parents and illnesses. Add in several recessions and a global pandemic, and it’s hardly surprising few find themselves flush with savings.

“Don’t blame yourself,” says Mark Miller, author of “Retirement Reboot: Commonsense Financial Strategies for Getting Back on Track.” “There are probably good reasons why you’re in the situation.”

Don’t despair either. The retirement math isn’t quite as daunting as it initially appears. Social Security replaces on average about 40% of your current income. You’ll need to fill in the remaining gap. That’s not small, but it’s more manageable than 100%.

Three Insights for Your Financial Journey

There are several powerful levers you can pull that can enhance your financial security. The levers include delaying taking Social Security to boost your monthly benefit, working a few years past your anticipated retirement date, and tapping into home equity. Not every suggestion will make sense for your household and circumstances. But some combination of strategies can make a genuine difference in your late-life financial security.

“There are still things you can do that will have a positive impact,” says Miller. “These aren’t gimmicks.”

Three basic framing insights can help you navigate your financial journey. First, you’ll want to gain a deep knowledge of your household finances. What do you own? What do you owe? What are your expenses? These calculations offer invaluable information about the current state of household finances.

“You have to be real about where things are. You need situational awareness,” says Joel Larson, a certified financial planner and founder of Navion Financial Advisors in Sacramento, California. “You can’t guess. You have to put the data down.”

Second, don’t embark on your retirement journey alone. If your finances allow, hire a professional to help you create a roadmap for improving your economic security. Whether you hire a professional or not, everyone should tap into the life experiences and lessons learned by family and friends — people you trust, important members of your network. Their feedback and suggestions can help you winnow down your ideas into a winning strategy.

“Most of us have spent a lifetime building relationships and they’re critical to our financial success,” says Bradley Shurman, founder and chief executive of The Super Age, a global strategic research and advisory firm in Washington, D.C., focused on demographic change. “Good friends and family can give good advice about what works and what doesn’t.”

Third, the word “retirement” still retains a powerful association with full-time leisure. Rather than thinking about retiring, consider this stage of your life as an opportunity to explore what you would like to do next. What activity might offer both purpose and a paycheck in your next chapter.

“You’re retiring from one thing and going into what you prefer,” says Nneka Constantino, a vice president and senior financial advisor with Merrill Lynch Wealth Management in St. Paul, Minnesota. “Preferment is the new retirement.”

Prepare to Pivot

These three steps help build a foundation for smart decision-making. Even the best plans can be upended, but knowing where you are and where you would like to go helps if the unexpected gives you a jolt. You’ll probably have to pivot at some point. Like Peggy Schultz, age 62, did.

She worked in the authorization review department at a hospital in Bemidji, Minnesota. Her job was a big part of her identity. Mark, her husband, age 66, is a craftsman and artist. He has always worked but never had a regular income. They have enjoyed their work lives, including owning a small store for several years.

They never made much money, so they didn’t salt away much in retirement savings. Peggy’s plan was to work several more years and then retire. “I would have sat in front of a computer for another four years,” she says.

Important Benefits

But last January she was diagnosed with pancreatic cancer. Luckily, the cancer was caught early. She had major surgery and chemo treatment last year. After recovering, she returned to work in November but retired in January of 2023 and filed for Social Security.

Her husband also filed for Social Security, which is now their primary source of income. “It is important to us to live and breathe in each day knowing that each is a gift,” she says. “And one that we treasure.” (I’ll return to this couple’s financial strategy in a moment.)

Time to talk money. When it comes to financial security in retirement, the social insurance programs Social Security and Medicare are the two most important benefits. Spending time to understand each program is worth the investment.

The most important lever for typical workers is when to file for Social Security benefits. The argument for delay is persuasive. The monthly benefit is potentially 76% higher if you wait to start receiving benefits when you are 70 (the latest) rather than 62 (the earliest).

Social Security has established a “full retirement age” for everyone possessing one of its cards; the so-called FRA for each person is based on when he or she was born. (The current full retirement age or FRA is 67 years old for people reaching age 62 in 2023.)

Maximizing Social Security

Once you reach your full retirement age, you can postpone your benefit until you are 70; each year you postpone receiving the benefit it grows by 8%. You can’t outlive your Social Security benefit and it comes with automatic cost of living adjustments.

Married couples should coordinate their claiming strategies to optimize their benefit. For instance, it often pays for the spouse with the higher benefit to postpone filing beyond his or her full retirement age. One advantage of this strategy is the surviving spouse can collect 100% of the deceased’s benefit so long as the survivor has reached full retirement age or older.

(A good resource for learning more about filing strategies for married couples is “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” by the Boston University economist Laurence J. Kotlikoff and the journalists Philip Moeller and Paul Solman. Several online tools are also useful; they include Social Security Solutions and Maximize My Social Security.)

That said, filing early may well be the smart option for some people, including those in poor health, with caregiving responsibilities, and dealing with long-term unemployment. Think Peggy.

Understand Medicare

Medicare is the main health insurance program for people 65 years and older. The big choice is whether to join original Medicare or one of several Medicare Advantage plans offered by private insurance companies.

Advantage plans often cover services — such as dental and vision care — that are not included in original Medicare. But Advantage plans require you to use the plan’s in-network health providers or be prepared to pay more for out-of-network services.

If you choose original Medicare with its greater flexibility, you will want to buy supplemental “Medigap” policies to help meet costs not covered by Medicare. (Every state offers a State Health Insurance Assistance Programhelp navigate the Medicare maze. The Medicare Rights Center offers a free national helpline to answer questions about benefits and enrollment decisions.)

Work a Little Longer

Working longer is another option for near-retirees without savings. One of the main benefits of putting in a few more months or years at work is it makes it practical to delay filing for Social Security. Even once you are receiving Social Security benefits, a job or jobs can supplement your income. You can still set aside some of your earnings into savings.

Take this calculation drawn from “The Power of Working Longer,” a scholarly paper by four economists. After reviewing a variety of scenarios for people nearing retirement, the researchers found that if some employees work just one month longer they could increase their retirement income as much as if they had increased their 401(k) contributions from 6% to 7% of their salary (with a 3% employer match) over a decade.

Of course, many people put in more than one month. “Primary earners of ages 62 to 69 can substantially increase their retirement standard of living by working longer,” write the scholars. “The longer work can be sustained, the higher the retirement standard of living. For example, retiring at age 66 instead of 62 increases living standards by about one-third.”

Working longer is not a panacea. Deteriorating health is a major reason people retire earlier than they would like. Still, the working-longer decision does not have to be binary — more years on your old job or retire. People could shift to part-time work or jump to jobs with flexible hours.

Work for Yourself

Self-employment rises with age, sometimes by turning personal interests into a sources of income. For example, people who love to garden may start a small service business taking care of neighbors’ gardens. “There are lots of ways to make money,” says Shurman. “Monetize your passion.”

Houses are the single largest asset for most older people. The homeownership rate for people 65 and older is roughly 80%, according to the Census Bureau. Among homeowners ages 65 to 74, home equity accounts for some 47% of their net worth.

A classic way to turn home equity into cash is to downsize (move to a smaller dwelling) or move to a cheaper location. If moving isn’t desirable, you might want to consider a federally backed reverse mortgage. Reverse mortgages have had a checkered past, but the product has improved, and the option is worth learning about.

Your Largest Asset

Briefly, to qualify for the federally backed reverse mortgages (Home Equity Conversion Mortgages insured by the government account for about 90% of the market) you need to be at least 62 years old. You must live in the home and own the property outright or have paid much of the mortgage. No other debts can be attached to the home.

Much like taking out a conventional mortgage, you’re required to verify your income, assets, monthly living expenses and show you have enough financial resources to pay for homeownership costs — homeowners’ insurance, taxes and upkeep.

Loan value is determined by a formula that considers your age, the home’s value and interest rates. You don’t make any out-of-pocket payments on the loan. Instead, the reverse mortgage is paid off when the borrower moves out of the home or passes away. You’ll never owe more than what the house is worth.

One Couple’s Experience

These are some of the biggest levers people have to work with to build their financial security. Now, let’s return to Peggy and Mark to see how they’re handling finances.

They have always lived fugally and, even though they don’t have much in savings, they don’t have any debt. No mortgage. No car loan. No credit card debt. They plan on selling their home in Bemidji and moving into a smaller place in Duluth that will not only come with lower maintenance costs but will be near children and grandchildren.

They just bought e-bikes and they’re experimenting to see if they can get rid of one of their two cars by using e-bikes and public transportation more. Mark is on Medicare, and Peggy has health insurance, thanks to the Affordable Care Act. She will get a small pension from her former employer.

“We need to right size,” says Schultz. “We want to have experiences that don’t cost a fortune.”

Assessing Next Steps

She’s also trying to decide what comes next. What activity or activities will offer purpose and flexibility. One thought is becoming a docent at a museum. Teaching English as a second language also intrigues her.

Retirement is a major life transition. The handful of practical strategies offered here — and the many more ideas that you’ll read in this series — can help you build a more secure financial future. What works for you will probably change with time. You can handle the uncertainty by investing in knowing more about your options.

“Take ownership of your process and your journey because it’s your walk,” says Constantino. “We’re all going through it.”

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