Part V: Financial Management in the Retirement Years

This is Part V of the guide, Understanding Loans and Credit At Every Stage of Life.

Effectively handling one’s finances in later life requires good planning in earlier years and vigilant awareness of your financial situation as the years continue. Advances in the medical field continually raise the life expectancy for U.S. citizens; as of 2010 the average American could expect to live to be 78. This upward trend means that it is likely that you will need your retirement income to last over time.

In later life, most Americans do not face a need for loans other than the ones already discussed; their focus is instead on effectively managing assets in order to enjoy a comfortable retirement. However, homeowners over age 62 are eligible for a reverse mortgage. If you have completely paid off your home and meet the age requirement, you may qualify. If this type of loan, you borrow against the equity built up in your home. Closing costs, loan fees and interest apply as if you were borrowing money from a bank, but in this case the bank pays you instead of the other way around. You may choose a lump sum payment, monthly cash installments or an open line of credit to use at your discretion. The loan is considered due at your death and the bank takes possession of your home. Reverse mortgage lending can be tricky, however; carefully consider the loan terms and your future financial needs before you commit.

How Will I Live?

Retired workers in the U.S. generally juggle four main sources of income to meet expenses.

  • Social Security benefits account for the largest source of income; 65% of retirees count Social Security as at least half of their monthly income.
  • Assets such as retirement accounts and other investments that produce income may supply funds if you have planned carefully.
  • Though they are far less common today, many retirees still receive a pension from their former employer.
  • Lastly, employment is an option for many retirees who consult in an industry that can benefit from their years of expertise, or work at an interesting part-time job.

By the time you have reached retirement age, you should be making your investments work for you to provide for your needs. This can be best approached backwards: consider the big picture and estimate your annual income from all of your income sources. Once you have an expected annual figure, deduct three categories from this figure: monthly living expenses, discretionary spending such as travel or hobbies, and contingency expenses for illness or long-term care.

While you cannot predict how long you will live, projecting your future financial needs this way can help you assess whether your retirement savings will allow you to live comfortably. If the numbers are discouraging, it is not too late. Downsizing your home (see Part IV: Loans and Credit Options for New Families), continuing to work and making short-term investments are all options that ensure your financial well-being in retirement.

Should I Downsize?

If you are able to maintain a larger home and have a nest egg that provides for health care needs, then it may be wisest to stay where you need not make monthly payments. Taking out loans at this stage of life can be risky, as unexpected health care costs for the elderly can be astronomical. However, if you struggle with the proper upkeep of a larger property or have no plan in place for future expenses, downsizing your home may be the easiest way to produce a retirement cushion.

If your home is paid for and you move to a smaller home or condominium, the profit can immediately boost your nest egg. This profit, managed wisely, can be reinvested to produce more annual income. Smaller homes also are accompanied by lower costs of living, as utility bills, upkeep and maintenance expenses are lower for a smaller property. Depending on where you live, you may be able to reduce your monthly expenses by moving to another part of the country. If you purchase a new home (versus renting) you will not lose mortgage interest and property tax deductions, and the vastly differing tax rates among individual states may entice you to relocate.

If your home is not completely paid off, it may still make more financial sense to move to a smaller property. It could take time in today’s real estate market, but the equity that you have already established can be leveraged to your benefit. Lower cost of living and fewer maintenance needs, along with a smaller mortgage payment, may create enough cash surplus for you to make short-term investments that will continue to provide you with an income. If you die before a new mortgage is paid off, the balance will be taken out of your estate. If you have enough assets to pay off the loan, you may will the property to a family member. Otherwise, the bank that holds the title to your property will foreclose.

Some retired individuals may crunch the numbers and conclude that renting property is a better decision (see Part IV: Loans and Credit Options for New Families), perhaps if there is not enough available equity to produce investment income, or if the desired location is highly priced. A quick way to determine this is to divide the purchase price of a typical home by 20; if that number is significantly higher than rents in the area, it may be better not to buy a new property. If you would like to try out different retirement locations or be available to move nearer your family, renting offers flexibility. Retirees who rent also enjoy freedom from property maintenance; after tending your own property for many years it may be a relief to simply make a phone call when something needs repair. Some retirees also split residences into summer and winter homes and may find that renting better meets their needs.

Estate Planning

Though it may be unpleasant to consider, responsible financial management also includes the preparation of a will. A will is a legal document that is signed in the presence of witnesses. It identifies your assets, defines how they should be distributed and specifies the care of any minor children left behind. If you don’t have a will and die intestate, the state you live in will follow a preset formula to divide your assets. Any debt that you owe at your death will be paid out of your estate. Unfortunately many families have become divided by disagreements over the proper distribution of a loved one’s assets, and it is in your best interest to make your wishes clear before your death.

Wills cover assets like cars, property or businesses that you may leave. They also specify clearly what each of your heirs should receive, including family heirlooms. A will may be broadly stated or narrowly defined; for example, you may simply divide your estate equally among your heirs, or you may designate specific parts of your estate to heirs that you name. Wills do not cover funds from life insurance policies, retirement assets or property owned by unmarried couples. If you have a large estate or life insurance policy, you may wish to work with an attorney who specializes in estate law to ensure that your surviving family members are protected.

Continue to Part VI: Financial Preparedness Checklists.
Back to Table of Contents.