How to Fund Your Retirement in a Down Market

November 20, 2020

As an older American adjusting to the post-pandemic “new normal,” you may not only be looking at half-empty restaurants, airplanes, stadiums and cruise ships, but also a retirement picture that is quite different from last year or even just a few months ago.

If you have money invested in an IRA or 401(k), you probably have first-hand evidence on your computer screen or quarterly paper statement that your retirement account may be 10% or 20% off its pre-coronavirus highs.

This wasn’t supposed to happen. You worked hard, put money away, and tried to plan for a worst-case scenario. But a pandemic? Few saw that one coming. Nevertheless, it’s here, and you have to respond with real measures so you can continue to fund your retirement.

Here’s a game plan to consider. Of course, before taking any actions, discuss your plans with your financial advisor or other trusted financial professional. You may not find all your answers and solutions at once. Rather, consider your approach a work-in-progress, with emphasis on the word, “progress!”

Consider a reverse mortgage loan

The flexibility of a reverse mortgage is such that you can arrange to receive your cash payment numerous ways, including as a line of credit. With a reverse mortgage line of credit, you pay interest only on the amount that you use, while your unused portion continues to grow year after year, helping you build an even bigger safety net for a future emergency.

In a down market, many retirees use their reverse mortgage line of credit for the money they need to help preserve their retirement portfolio. When the stock market recovers sufficiently, they resume drawing from their retirement account. Employing this strategy is especially useful in defending against sequence of returns risk, which can occur if investors early in their retirement are regularly withdrawing money from their retirement during a prolonged market slump. This double dip can accelerate the depletion of the retirement account.

A reverse mortgage is also a great way to generate better cash flow. That’s because if you have a current mortgage, your new reverse mortgage will pay it off. You will still have a mortgage, but your new reverse mortgage doesn’t have to be repaid until you leave the home, which could be years or decades later.  Although you won’t have monthly mortgage payments to make, you are still responsible for honoring your loan terms, including maintaining your home and paying your property taxes and homeowners insurance.

A reverse mortgage can help you another way as well. Many retirees who need to fund their retirement in a down market elect to take their Social Security earlier than planned. But by making this decision, they are diminishing the size of their eventual Social Security payout by roughly 8% a year. Your eight-year Social Security window begins at age 62 and ends at age 70. By pulling funds from a reverse mortgage, retirees can preserve the larger Social Security payout they had planned on.

To qualify for a reverse mortgage, you have to be 62 or older, own and live in the home as your primary residence (at least six months out of the year) and have sufficient equity in the home.

Invest in Your Network

Even if you apply and are approved for a reverse mortgage loan to help stabilize your retirement, you shouldn’t sit idly by while your paperwork is being processed. There are other things you can be doing to make your retirement more secure.

For instance, you may be used to talking more about your net worth than your network, but investing in the latter could produce some real dividends. Check in with your network of relationships to see how they are coping. Maybe some have pulled out their sewing machines and started stitching together masks for profit. Perhaps, they’re earning extra bucks delivering food via Postmates or putting their teaching skills to use as online tutors. You just might find out that your long-time friend, who lost her part-time dance instructor job, is now working in an Amazon warehouse.

The point is, you have to be flexible and prepared for a world where your former job, full or part-time, may no longer exist, especially as companies and corporations reshape and rethink how they operate. When you understand what’s changing, you have the opportunity to better manage your own outcome. Use your network to keep you informed, grounded and nimble.

Rent out a room in your home

There’s nothing like a crisis to stir your creativity. It’s been said many times that necessity is the mother of invention. If you have the good fortune of owning a home, and you have a spare room, you could lease it out. Hosting a tenant is a smart way to help pay bills and pad your financial cushion — and you’ll be doing your part to help ease the housing shortage. There are all kinds of services, such as silvernest.com and seniorhomeshares.com, to get you started. If you need to fix up a room — maybe convert an office into a bedroom — the funds from a reverse mortgage may help you cover the cost of the improvements.

Downsize your living arrangements

If you are currently living with “too much house,” now may be the time to downsize to one easier to maintain. A single-story home might be easier to get around in and also less expensive to cool in summer and heat in winter.

You could also downsize to a community that is closer to the services and amenities that are of enormous importance to you at this stage of your life.

If preservation of cash is your main goal, you could use a reverse mortgage to help you purchase the home. In a reverse-for-purchase, as this loan transaction is often called, you come in with a down payment, using funds from the sale of your previous home or from other savings and investments, and your lender will come in with the rest to complete the purchase. By avoiding an all-cash transaction to purchase your new home, you will have more cash available for your other retirement needs. While there are no monthly mortgage payments to make with a reverse-for-purchase loan, you are still responsible for maintaining your home, paying property taxes and homeowners insurance and honoring all loan terms.

If your move indeed leaves you with more cash, invest it wisely. One lesson the coronavirus crisis has made clear is that you need to have cash on the sidelines to help you ride out a crisis. Work with your financial advisor about developing an asset allocation plan (stocks, bond, cash, real estate, etc.) that you believe is appropriate for your current age, risk tolerance, and retirement goals.

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A down market may challenge you to come with new, creative ways to keep your retirement on track, but it’s doable. Bring a can-do attitude to your mission, expand your network and be open to new ideas, like backing up your retirement with a reverse mortgage if you believe it’s a good fit. Develop a plan and put it to work!

We hope this article has given you some help with things to think about. Of course, every situation is different. This information is intended to be general and educational in nature, and should not be construed as financial advice.

1 https://www.cnbc.com/2020/03/22/why-long-term-investors-should-never-sell-stocks-in-a-panic.html


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