Money Management for Retirees
by Kathie Dickenson
So you’re one of the lucky, or frugal, people who managed to accumulate a fair amount of savings for retirement before things like IRAs, Roth IRAs or 401Ks were around to help. But you’re keenly aware that, at current interest rates, that money in the bank isn’t generating the retirement income you had hoped. You could use additional income for health care costs, for home upkeep, for maintaining your chosen lifestyle or for other reasons. Drawing on the principal of your savings is scary, since you could run out.
“Running out of money is one of the biggest fears of people who are retired,” says Radford University finance professor Clarence Rose. “People in retirement are faced with making hard choices. There is no easy solution.” Rose, whose articles appear in such journals as Personal Financial Planning and Journal of Financial Planning, does offer some suggestions.
Earn Money While You Stay at Home
If you own your home, either free and clear or with significant equity, it’s a potential source of income, says Rose. If you’re like most seniors, you want to stay in your home. Rose explains two ways you can stay there and still gain income from this valuable asset.
The best way, says Rose, is through an intrafamily sale leaseback agreement. This is how it works: You, the retiree, sell your home to one of your heirs, preferably a son or daughter. You can provide seller financing, which means your child, the buyer, will pay you monthly mortgage payments. After the sale, your child immediately leases the home back to you. You become a renter with a lifetime lease in the home you just sold. Your child becomes a landlord, responsible for taxes and upkeep. If you agree to a rent amount less than the monthly mortgage payment, you’ll have additional income each month. You’re still living in familiar surroundings, the home is still in the family, and your child has found an affordable, respectful way to help you.
Rose warns that to take advantage of available tax benefits, the terms and conditions of an intrafamily sale leaseback agreement must reflect fair market value in the sale price, the rent amount and the interest rate on the seller-financed mortgage. Even within these “arm’s length” IRS requirements, he says, the interest rate and monthly rent can be somewhat flexible.
If you have no heir who is willing or financially able to enter a sale leaseback agreement, an alternative is a reverse mortgage, says Rose. In this arrangement, in most states, homeowners age 62 or older can convert some of the equity in their home to cash, a line of credit, a monthly income for a specified number of years, or a guaranteed monthly income for life, while living in and keeping the title to their homes. Interest and principal on this loan, whichever form it takes, is due to the lender only at the end of the specified term or at the homeowner’s death, in which case the balance is paid off from the sale of the house and the homeowner’s heirs receive any remaining excess equity.
While a reverse mortgage is right for some people, says Rose, it’s an expensive option. Both options require careful planning.
Money at Work
Although some retirees see stock investment as too risky - especially in light of the past few years’ gloomy market - Rose recommends that seniors with cash, a financial comfort zone and a 10-15 year outlook invest rather aggressively. Depending on individual goals and risk comfort level, retirees can include in their investment portfolios a higher proportion of stock investments than usually has been recommended, along with safer but lower-yielding fixed-income investments such as bonds or money market accounts. Keeping a financial cushion to prevent having to sell in a down market and maintaining a diversity of stocks crossing several market sectors are essential.
It is critical, says Rose, to educate yourself by reading a variety of sources, particularly the Wall Street Journal. He cautions that investment advice Web sites are inconsistent in their approaches and success rates. A financial planner can be very valuable in helping you determine how to make the most of your assets, but, again, educate yourself first. “You wouldn’t go to a car dealer, hand him your checkbook and ask, ‘What car should I buy?’ You don’t want to do that with your retirement assets either,” says Rose.