Seven New Realities of Retirement

As we approach the end of the 3rd quarter of 2012, economic recovery remains elusive for many Americans. Job creation is anemic, the stock market has remained relatively flat during the past 6 months, and interest rates are so low that “safe” investments have little to no yield. None of this bodes well for soon-to-be retirees. With that in mind, I’ve put together a list of seven realities facing those concerned about living on a fixed income.

Continued employment. This will likely be the most popular strategy of seniors over the age of 62. There are plenty of benefits (such as a paycheck) and if you’re lucky, health insurance, employer retirement account contributions, and paid vacations and sick leave. Plus, continuing to work may also provide you the ability to delay claiming your Social Security benefits. Each year you can put off taking Social Security, your benefits will rise by about 8 percent.

Social Security claiming strategy. As noted, each year you wait to take Social Security after age 62, your benefits will rise about 8 percent per year. This means a 35+% increase from age 62 to 66 and more than a 100% increase realized by waiting until age 70. If you are able to put off claiming your Social Security benefits, that eight percent may prove to be the best rate of return on any investment. Check the Social Security Claiming Guide for more information.

Taxes. The economic and political weight of enormous budget deficits makes it all but certain that your taxes will rise. Obamacare is making it look more likely that two new related tax hikes for affluent taxpayers will occur next year: a 3.8 percent investment tax and an 0.9 percentage-point increase in the Medicare payroll tax. The 2-percentage point cut in Social Security payroll taxes will expire at the end of this year. As you think about your future income needs, you should create some alternative budgets that feature 5-percent and even 10-percent cuts in your spending money due to tax hikes.

Health insurance. Medicare beneficiaries have been clear winners–to date–from health reform. But with concerns about long-term cuts in some Medicare spending, one can never be sure where the system is headed. Medicare recipients should keep health expenses in mind when budgeting for retirement.

Reverse mortgages. Reverse mortgages are worth a look, but carefully. These loans leverage the equity of homeowners who are at least 62 by allowing them to eliminate mortgage payments and even receive monthly payouts from their mortgage company. Reverse mortgages are federally insured programs and legitimate options for seniors with substantial equity. The new federal Consumer Financial Protection Bureau has recently issued a cautionary report on reverse mortgages. Due diligence is definitely required.

Revised financial plans. Simply stated, most experts advise retirees to adopt more conservative investment objectives as they get older. The reason- illustrated painfully in the market crash- is that older investors are very vulnerable to market losses and need more defensive investment strategies. Retirement tools such as annuities offer less risk than stock market investing.

Reduced retirement spending. Perhaps the best advice in making retirement assets last a long time is to spend no more than 4 percent of your assets a year. This will typically assure that you won’t outlive your money. Whatever number makes sense to you, it needs to be accompanied by a strategy to actively manage your retirement assets to produce whatever level of payouts you’ve selected. This is crucial to your future financial stability as well as your peace of mind.