Solving Retirement Crisis Requires Efficiency

April 26, 2016

In the last three columns, I outlined potential looming problems of retiring Baby Boomers; a lack of savings, shortfalls in pension funding and Social Security and rising medical and other costs for tomorrow’s senior population.  In this article, we’ll look at a few potential solutions to consider.

The theme and key to navigating through these potential financial storms is financial efficiency and flexibility”, or put simply, to make the most effective and mindful use of the financial resources available to you.  While financial efficiency is admittedly not a new concept, it will be extremely important to most seniors if they expect to sustain a satisfactory retirement lifestyle.

First, each retiring individual or couple needs to undergo a retirement income analysis, whether done on their own or by a financial professional.  With many variables and a potential 25-30 year retirement period, finding weaknesses in retirement finance is difficult, if not impossible, without understanding the numbers and whether the results and probabilities are favorable.

Next, for many seniors, including new or little-used sources of funding to help with the goal of efficiency could be crucial.  One concept that is receiving attention in the financial planning profession is implementing and strategically utilizing a Home Equity Conversion Mortgage (HECM) early in retirement.  The HECM is the official term for a reverse mortgage line of credit.  The basic concept is to utilize home equity for several purposes; a source of funding for occasional large home expenses, (new roof, etc), a source of income when investments experience a decline in value (avoiding withdrawals of principal just after  market declines), supplemental income if pension income falters, or a contingency fund for unexpected medical costs.  Details are too complex for this space, but academic research indicates utilizing a HECM strategically could provide extended longevity of overall asset value and higher probabilities of financial success in retirement, as well as fulfilling a goal to leave something to heirs.

Another development is the use of hybrid life insurance to provide dual-duty risk management protection.  Several innovative companies are issuing life insurance with a “catastrophic healthcare” or long-term care rider benefit.  This type of policy could provide a payout benefit in case of premature death, or later if needed, a source of funding for custodial care expenses late in life.  If the insured never needs custodial care, the death benefit would then be paid to the policy beneficiaries.

Part-time work in retirement is not a new concept in retirement, but may be the “new normal” for many seniors.  In fact, many Baby Boomers today embrace the idea with longer spans of good health and a desire to sustain purpose in their later years.  Planning ahead for this shift of work-life is recommended however, since it is better to be selective about employment rather than succumbing to need, rather than choice, when the time comes.  A move to less-expensive parts of the U.S. (even foreign countries) might also be considered.

The suggestions above may or may not be appropriate for everyone and implementation should be with a thorough understanding and careful planning.  Utilizing professionals to help you evaluate and coordinate these aspects of your finances could be well worth the expense as well.