How to recover from financial difficulties in retirement

How to recover from financial difficulties in retirement

Most retirees end up experiencing financial difficulties. It could be a divorce, a serious illness or injury, a severe stock market crash or the bankruptcy of a family business. Some advance planning can make it easier to recover from a financial setback.

Here are some common ways to cope with financial hardship in retirement:

  1. Remedy your situation.
  2. Build an emergency fund.
  3. Apply for financial assistance.
  4. Create a wealth account.
  5. Take out a 401(k) loan.
  6. Use a reverse mortgage.

Remedy your situation

Depending on the nature of the difficulties, you may be able to take steps to improve the situation. You could go back to work for a while. “Earning more income could be getting another job or starting a side gig that can make money,” says Brendan Sheehan, managing director of Waymark Wealth Management in Marlborough, Massachusetts.

Another way to increase your income is to improve your investment strategy. “Earning a better rate of return on your assets often means looking for more aggressive investments in your portfolio,” Sheehan says. “Often retirees keep more money than they should and end up getting a lower rate of return as the cost of living increases. I call it losing money safely.

Create an emergency fund

It’s not always easy, but a good way to combat unexpected expenses in retirement is to create an emergency fund. “The fund should contain at least three months of living expenses in case of an unforeseen event such as unemployment or sudden medical expenses,” says Tommy Gallagher, founder of Top Mobile Banks in Bern, Switzerland.

Apply for financial aid

Many people turn to family and friends in times of financial need. You can receive donations of up to $16,000 completely tax-free. In 2023, this figure increases to $17,000. If you are negotiating a loan with a family member, be sure to specify the terms necessary to fulfill the terms of the loan.

Create a wealth account

If you find you’ve come out a little early at the end of a given month, you can put those funds aside for the future to help absorb a financial shock down the road. “This account can be a passbook savings account, and it’s only designed to collect the money that’s left over at the end of the month,” says Chuck Czajka, founder of Macro Money Concepts, a financial advisory firm in Stuart, in Florida. “Then work out how much of that should be put into a six-month or longer emergency fund using the assets you’ve accumulated in the wealth account.”

Take out a 401(k) or personal loan

A personal loan from your bank or a 401(k) loan can help ease a difficult situation. “If you’re going to borrow to alleviate a financial hardship, you also need to have a plan to pay it back, or you’re just trading one hardship for another,” Brandon Ashton, director of retirement security at Cornerstone Financial Services, told Reuters. Southfield, Michigan. “A part-time job and a reduction in overspending can also go a long way towards preparing for and emerging from a financial crisis.”

Take advantage of a reverse mortgage

If the financial difficulties are significant, you can consider a reverse mortgage as a last resort. The most common type of reverse mortgage is a Federal Housing Administration insured loan, also called a home equity conversion mortgage. “It allows people over the age of 62 to access the equity in their property and turn it into cash,” says Edward Herda, vice president of brand strategy for American Advisors Group in Irvine, Calif. . “Borrowers choose a reverse mortgage because it allows them to stay in their home, as long as they meet the terms of the loan, and provides funds that can greatly supplement their retirement income. »

Seniors can use a reverse mortgage to free up money to cover other major expenses. “The proceeds can be used in a variety of ways, such as paying for health care costs or funding home renovations,” Herda says. “A reverse mortgage helps seniors cover unexpected expenses.”

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