Humpty Dumpty Had a Great Fall: Rebuilding your nest egg

Meltdown was the term used to describe the 2008 financial disaster. Now your retirement picture feels like a full on Chernobyl. You were only ten/five/one year from retirement and now retirement seems like a pipe dream. Will you have to keep working the rest of your life? Will you have to take major cuts in your lifestyle? Not only has your portfolio taken a beating, but your house value crashed and you can’t sell it if you wanted to. What do you do?

Even if it is the bottom of the 9th and you’re down five runs, that doesn’t mean it’s too late for a rally. That isn’t to say that dumping all your savings into high risk ventures and going for the grand slam is the best idea. You should take it one base at a time, and start by cutting back discretionary spending where you can. Consider the possibility that you may have less income in retirement than you planned. It’s best to get used to that now; while increasing your potential retirement income simultaneously.

Second, don’t jump ship. No matter how tempting, cashing out your 401(k) or IRA is the wrong move. You already rode the bear, so you might as well hold out for the bull. Take time to analyze your investments and possibly rebalance your portfolio. The Federal Reserve is holding interest rates low now, but they have to go back up sometime (2014 perhaps). Take this opportunity to put yourself in a good position.

Consider a fixed or variable annuity. Think of an annuity as reverse life insurance. In life insurance, you collect if you die. In an annuity, you collect if you live. The difference between a fixed and variable annuity is the amount of payment you get back. Fixed will be one static rate, while variable will be tied to interest rates and the market. Make sure to examine the investments tied with your variable annuity before committing to one.

If your underwater mortgage is holding you back, you might want to at least consider short selling or foreclosure. This is not ideal, but sometimes a structured withdrawal from obligation is the only way to prevent bankruptcy in the long run. Your credit will take a hit, but it might be worth it if your mortgage is preventing you from saving or worse, depleting your savings. Make sure to do comprehensive research first. On the other hand, declaring bankruptcy may be a better option. Chances are, if your mortgage is a problem, your finances as a whole are in trouble. Refinancing is usually the best option, if it’s possible, especially because interest rates are so low right now.

On the other hand, if your mortgage is paid off, you can consider a reverse mortgage and take advantage of your accumulated equity. There are disadvantages to this, however. You are trading your current equity for income, and you are paying interest on it. By simply selling your house and downsizing, you will have a greater yield on your investment. Since selling may not be desirable, or even an option, a reverse mortgage may still be worth looking into. Keep in mind, it is a form of loan and will have to be paid off in some way. Another good option is creating a reverse mortgage with your children acting as the lenders. It can provide a structured income without some of the risks associated with a traditional reverse mortgage. The loan and interest are repaid when the children inherit the house. You will have to pay taxes on the phantom interest during the life of the loan, however you will not owe capital gains tax after the house is inherited.

Don’t forget about Social Security. Even if you retire early or work a part time job, you can receive some Social Security benefits. Social Security is designed as a supplement, and should not be the sole source of income. If you decide to delay retirement, your Social Security income will also increase, compounding your earnings.

Additional Resources

Advisor One How to Rebuild Retirement Income: http://www.advisorone.com/2009/01/01/how-to-rebuild-retirement-income

Wall Street Journal Market Watch Quick ways to rebuild retirement portfolios: http://articles.marketwatch.com/2009-09-23/finance/30767694_1_retirement-portfolios-financial-goals-jo

Kiplinger Repair. Rebuild. Retire: http://www.kiplinger.com/magazine/archives/2009/09/rebuild-your-retirement-plan.html

Investopedia 7 Tools For Rebuilding Retirement Savings: http://www.investopedia.com/articles/retirement/09/7-vehicles-to-rebuild-retirement.asp#axzz1vtyz9snp

US Boomers Annuity Basics: http://www.usboomers.com/annuity_basics.htm

Reverse Mortgage Disadvantages: http://www.reversemortgagedisadvantage.com/

Social Security Administration: www.ssa.gov

Reuters Analysis: Best Ways to Financially Support Aging Parents: http://www.reuters.com/article/2011/10/26/us-retirement-parents-idUSTRE79P72O20111026

 

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