Any true sailor knows how a sudden change in the weather can turn a pleasure cruise into a frightening experience. In much the same way, as you’re sailing on toward retirement, you might be hit by a sudden squall – or possibly even an all-out hurricane. The personal financial crisis may come in the form of a job loss, a divorce, or a health setback that forces you to adjust your plans. Will you have the tools in place to recover?
Having a Personal Financial Crisis Close to Retirement is “Doubly Stressful”
That’s the point of this recent article from the Kiplinger financial website, written by financial planner Mike Piershale, called “How to Recover from a Pre-Retirement Financial Crisis.” He writes, “If you’re close to retirement, the pressure is on because you don’t have much time to bounce back from something like a job loss or divorce. Having a personal financial setback when you’re closer to retirement can be doubly stressful. You’re dealing with both the financial reversal, and the realization that you have less time to earn the money back.” Whether the crisis comes in the form job loss, an expensive illness, a divorce or a business failure – or even a more foreseeable “crisis” such as failure to save adequately or having too much debt – the important thing is to take action and not ignore the problem. The sooner you get a strategy in place, the sooner the emergency will pass.
The Kiplinger article says you need to begin with a reality check. “Start by facing the reality of your situation. This may be easier said than done, especially when you’d rather avoid the anxiety and guilt from facing up to the reality that you are not financially prepared.” Having an honest conversation with a professional financial counselor or a trusted friend might help. But if your financial reality has suddenly shifted, you’ll need to get specific, and quickly. “You must create a budget to help establish a positive cash flow as the next step,” says Piershale. “If you’re spending more money than you earn, you’ll need to cut back on your spending immediately.” This will entail not only cutting fixed expenses but also increasing your income.
A Personal Financial Crisis is Aggravated by Excessive Debt
As we’ve discussed before here on the Aging Options blog, debt is a great burden for many retirees, and if you’re facing a financial crisis, too much debt is a likely contributor. Piershale advises what many planners suggest: reduce debt by tackling the account with the highest interest rate first. But other advisers suggest starting with the lowest-balance account and paying that off quickly, then using any extra funds to attack the next-lowest balance, so that you will increase your sense of accomplishment. Whichever strategy you choose, we suggest that this should be part of a conversation with a trusted professional financial adviser. He or she can make this an element of a financial dashboard, helping you see at a glance how much of a difference it will make to eliminate those debts by following a manageable plan.
On the income side, even in a financial pinch you still have options, says Kiplinger. Obviously a higher-paying job would be nice, but instead you may have to take a second part-time job or do some consulting or gig work for extra cash flow. Mike Piershale also reminds readers not to overlook savings. “Even if you have to start with smaller amounts, set aside a percentage of your paycheck each pay period to rebuild your cash reserve. This will help prevent a debt relapse the next time you have an emergency.” For many pre-retirees, fiscal realities necessitate an adjustment in their retirement date, requiring them to spend more months (or years) than planned on the job. “Working longer before you retire not only may help your saving and retirement accounts grow, but that’s not the only benefit,” says the article. “It also means there will be fewer years that your nest egg must support you. Working longer might also cut expenses if you can take advantage of employer-sponsored health insurance.”
Don’t Alleviate a Personal Financial Crisis with a Poor Social Security Strategy
One temptation Piershale says to avoid in times of financial crisis is the lure of taking your Social Security too early. The longer you delay up to the maximum benefit age of 70, the larger your benefit – not just for you but potentially for your spouse if your benefit is the larger amount. That’s because, if your spouse outlives you, he or she will likely be able to switch over to receiving your benefit amount when you pass away. Waiting longer to take Social Security is a good strategy for most people if your goal is improved long-term cash flow – but there are exceptions, so the advice of a good planner is in order before you decide.
One final option the Kiplinger article mentions if you’re in a financial pinch is a reverse mortgage. “Reverse mortgages do have drawbacks,” Piershale warns. “So, while the pros and cons should be investigated before deciding, they can be another source of predictable retirement income.” Again, consultation with an objective financial pro is recommended.
A Good Retirement Plan Can Prevent – or Minimize – a Personal Financial Crisis
Whether you’re facing a crisis or not, maintaining your discipline and resolve is a necessity. As the Kiplinger article puts it, “As you get on track financially, it will be critical to continue sticking with your budget.” We would add the importance of creating and adhering to a solid and comprehensive retirement plan, the kind that Rajiv Nagaich of AgingOptions calls a LifePlan. Having this type of plan in place as you approach your retirement years can go a long way toward minimizing the damage from unexpected job loss or health problems because finances and health are two of the critical dimensions covered in a LifePlan. The others – housing strategy, legal preparation and family communication – round out the basic pillars of LifePlanning and allow you to create a robust plan to build the type of retirement you’ve always hoped to enjoy. A LifePlan can help you anticipate and deal with a personal financial crisis long before it happens.
We hope you’ll accept our invitation to join Rajiv at one of his highly-popular LifePlanning Seminars, offered without cost or obligation at locations throughout the region. You’ll find a calendar of upcoming seminars here on our Live Events page, where you can also register online (or give us a call). Let Rajiv show you a better way to plan for retirement with a LifePlan from AgingOptions. Age on!
(originally reported at www.kiplinger.com)