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Retirement Finances- 2 Options for Planning for the Future

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Retirement is meant to be a time of relaxation and enjoyment but it can also be stressful if you haven’t prepared properly for it financially. If all you are relying on is Social Security you are destined for trouble. Social Security is not meant to be a pension plan but rather a safety net in addition to your personal planning. Unfortunately too many people have misunderstood it’s purpose. See:Planning to Start Your Social Security Insurance Benefits at Age 62?

There are, however, a number of things you can do to improve your personal financial situation. You should explore different ways to generate more retirement income for yourself; once you have more money to work with, aspects such as budgeting become a little easier. Here is a quick look at how either equity release or an annuity can possibly benefit to you later in life.

Retirement Financing Option #1- Utilizing Your Home Equity

Retirement FinancesIf you own your own home or property, then probably one of your biggest assets is your home equity. Utilizing equity may prove a viable option to generate some more money. Equity release, as the name implies, generates money by releasing the equity of the property or estate. This is often referred to as a reverse-mortgage. You still own the property, but instead of paying the lender money for interest and principal, the lender pays you an income based on its value.

The downside here is that the property is eventually taken by the income-provider. This is typically done after you die, meaning that it isn’t a physical problem for you. This does, however, cause problems if you would wish to leave your home to loved ones or if you need to go to a nursing home and would prefer to sell it sooner. In years past, the family home was kept in the family for generations and this was not an option. But these days the younger generation will probably already have their own home and inheriting another one is just one more headache to dispose of. So, if passing your home on to your heirs isn’t a priority, reverse mortgages can make good use out of property that isn’t important after you die.

Reverse mortgages are generally only available after the age of 62. One of the caveats is that you must still maintain the home and pay property taxes etc. So your obligations continue even as you become less able to perform them. In addition, the money you receive is not free. It is basically a loan against the future value of your home. So the lender must calculate how long it expects you to live before it can sell your house and discounts the amount of money it will give you based on that calculation. (The amount of the discount is their fee or interest). Because the lender has no idea how long you will actually live they are not only in the banking business but also in the actuarial (insurance) business so they will charge you a higher interest rate than the typical mortgage would. (Think: mortgage plus insurance.)

Another disadvantage is that you can not tap the full equity of your house. Most reverse mortgage lenders will only give you between 30% and 80% of the value of your home. After all they aren’t buying it and they may not get it for a long time, so they need to leave themselves a large cushion, “just in case.”  Some reverse mortgage lenders employ high pressure commission sales people who are willing to tell you just about anything to encourage you to take the money so you should be very careful that you know what you are signing and that it is the best option for you. More information can be found on companies specialized on retirement property such as McCarthy and Stone.

Retirement Financing Option #2- Annuities

If you want to keep your property, or you don’t have enough equity in your home, then you might consider an annuity. This works in a similar fashion when it comes to paying out income. But instead of using equity from property, however, you have to pay a cash sum in advance. In return, the annuity provider (typically an insurance company) guarantees you an amount throughout your retirement. The major advantage of an annuity is that it is guaranteed to pay a fixed sum for the rest of your life. Although the payment options are flexible and can be tailored to your specific needs prior to the commencement of payout, once payout begins the terms are locked in so you need to be sure the terms are acceptable before locking them in. Just as in a reverse mortgage the insurance company is taking a risk that you will live to be 100 (or older) and they will have to pay you for a very long time. On the other hand, you are taking a risk that you will pay them a large sum of money and receive very little and then die. This risk can be mitigated to some extent by having a separate insurance policy as well so that if you die early your heirs will get still get something.

Another disadvantage of annuities is their typically low interest rate.  Even though you have given the annuity company a large chunk of money and they may be investing it at 10% or 15% they will typically only calculate your fixed return at something like 3% so you could possibly invest the money elsewhere and earn a much higher return. But if you invest elsewhere, you also have the possibility of losing money in a market downturn. With an annuity you are guaranteed a specific annual income no matter what. And that peace of mind many be worth the lower return at least for a portion of your portfolio.

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Image courtesy of Vichaya Kiatying-Angsulee / FreeDigitalPhotos.net

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