An Income for Retirement
As the first of the baby boomer generation starts get closer to retirement, the reality of their financial situation is sinking in. They didn’t have a plan, or plan well enough, and Social Security will not provide them the income as it once did in years past.
Many baby boomer’s are deep in debt, namely credit card debt and their homes are not paid off, and they have nothing but Social Security to look forward to. Can anyone point me to the pet food aisle? The way things are going, it looks like there will be no enjoyment in their retirement for them – they will have to keep working.
But, there is time to do some serious financial planning. If you are in this situation, you have a few options. Here are some:
Sell Your Home and Rent
Your children should be grown by this time, and you qualify for Social Security – this doesn’t mean they still don’t live with you. In that case, it might be time to shove them out of the nest or use them as a source of income by charging them rent.
If you have a chunk of equity in your house, sell it, pay off your debt, invest the proceeds and rent something smaller, much smaller. With the boom in construction in years past there are nice new rental units available all around the country at reasonable prices. You might also find a house whose mortgage you can afford.
Depending on how much you have each month, you might be able to live a comfortable life, afford new clothes, health care and an occasional vacation, but you had better learn to budget and live frugal.
Reverse Mortgages
In this case, the lender gives you cash based on the equity in your home. You don’t have to repay the original loan (mortgage) – that happens when you either decide to sell the house or you and your spouse pass away. Your outstanding debts will first be repaid. The balance will come to you to use as you see fit. The loan is repaid when you sell or die: if any money is left from the equity, and you or your heirs get the balance.
These loans carry high fees, but are becoming very popular with people who need money and don’t want to move. Rising housing costs have created extra equity to borrow against. (Note: that was true before the Recession.)
Rent out a Room
If your house is big enough and you live in a desirable area, this may be a way to supplement your income. There are lots of variables, including the going rate for full apartments where you live and whether you want to charge a similar rate or slightly lower in order to attract a renter. A suite of rooms is obviously worth more in an attractive part of a city than it would be in a more rural community because its so much closer to various amenities.
If you do plan to do this, check local code to first make sure you can rent out a room without violating the law or ordinance, then talk to an accountant (CPA) to see if you qualify for any tax breaks for actively managing a rental property.
Move to a Cheaper Area
If you live in a high cost area you can relocate to cheaper parts of the country. The southwest and Florida is booming because of lower taxes and subsequently a lower cost of living. These areas have been attractive to retirees for a number of years now.
Many people are reluctant to move away from their lifelong neighborhood. They are afraid of the unknown. But if it means the difference between working at minimum wage or enjoying your retirement years, this is an option to consider. Some magazines routinely run articles about the best places to live in the US, which includes ares attractive to people who have retired.
Move to a Less Expensive Country
This is obviously not for everyone. It takes a certain sense of adventure and requires a large dose of acceptance and patience. You also have to be willing to part with your extended family, which can be hard for some people. Places like Mexico, Ecuador, Costa Rica, Panama, Brazil and Honduras have become a magnet for ex-patriot retirees. These countries offer some tax benefits in order to attract foreign retirees.
The cost of living is much lower, as the U.S. dollar goes much farther. Just don’t believe articles which tell you that you can live on less than a thousand a month. This is only marketing and a way to attract new comers. Before moving South of the border, check into amenities – healthcare, shopping, emergency care, and so on.
Continue Working
If you don’t have a home with equity, if you have more debt than equity or if you still have children to support, you will have to continue working. Depending on your job and your company’s retirement policy, you present employer might be able to keep you on. You chances are better if you have a needed skill. If necessary, offer to work part-time, or as a consultant. This saves your employer money on benefits and might clinch the deal to extend your employment a few more years.
Or you might be forced to look for new employment. Right now, the labor market is tight and it might be difficult for a boomer to get a job. If that continues to be the case five to ten years from now is anyone’s guess. If you need to keep working, this might be the time to start up a small business. You can develop it now in your free time and hopefully, when forced to retire, you will have an ongoing income.
Otherwise, plan for the worst. Assume the job market will not be good, take into account your skills and see what you can do about improving them. See if your employer pays for training. Otherwise see what training is available through a local community college or job bank. You will need to have something to offer a potential employer if you want to get a job when you’re over 50 or 60.
One good thing is that if you continue working, your Social Security benefits will continue to grow. But, there are mandatory withdrawal rules for conventional IRA’s that must be followed, but no one says you have to spend the money and you can always reinvest the amount you withdraw in a non-retirement account.
Some of the older baby boomer’s have maybe about 5 or so years until they reach retirement. If they never started working on a retirement plan yet, there no time like the present to start.
