You just can’t count on normal anymore. I was thinking about this last week when the earthquake hit and I had to duck for cover under a desk while in a meeting in Washington, DC. Being from California, I am used to and fully prepared for earthquakes, but not necessarily when I am in DC. Most DC residents were taken by complete surprise when they felt the earth shake in their city. They were fully prepared for a whole host of other things including the threat of a hurricane and the ever-present concern about another possible terrorist attack. You just can’t be prepared for everything.
Pre-retirees, however, need to have contingency plans in case the economy doesn’t turn around and “normal” doesn’t return. Retirement preparedness is changing in that some tried and true strategies retirees have commonly used in the past may not work anymore. Retirees used to count on getting a decent interest rate on certificates of deposit or the simple act of selling a home for retirement income. Unfortunately, you can’t count on them now. We certainly can’t prepare for every possible scenario but here are five scenarios to consider making contingency plans for in retirement:
Interest rates remaining low for extended periods of time.
Retirees used to get income by staggering the maturities of long term CD’s or bonds so one came due every year. This strategy of “laddering” five-year CDs or bonds used to mean enjoying the best of both worlds with higher rates from the longer maturities and some liquidity from having one come due ever year. However, retirees planning on using that strategy going forward may be sorely disappointed if five-year CD rates stay around 2%.
One alternative for income is dividend-paying stocks, many of which are paying 3-4% or more. In addition, these dividends tend to grow faster than inflation. There used to be a tradeoff between getting a higher income now from a bond or a growing income from stock dividends. While they still aren’t covered by FDIC insurance like a CD, they can provide more income both now and over the long run.
Home prices remain low.
Many retirees plan to use their home equity by taking a HELOC or a reverse mortgage to pay for care in an assisted living or skilled nursing home if needed. Unfortunately, much of that home equity may have disappeared in the current housing market. As an alternative, consider purchasing a long-term care policy while you are healthy enough to qualify. Many policies cover home care as well as skilled nursing facilities, and some policies even pay for custodial care a family member renders. This way you don’t need to rely on recovering home prices that are unlikely to rise as fast as long-term care costs.
Your home won’t sell.
Along with home prices being down, there may be the similar issue of not being able to sell the home at all. Hindsight is twenty-twenty, and I am sure there are plenty of homeowners who are kicking themselves for not selling their homes when they could have instead of waiting for the perfect time or the perfect price. If your retirement plan is contingent on being able to sell your home, make sure you also have a plan B and manage your retirement plan around that possibility since you may not be able to sell exactly when you want to. Keep in mind that if you rent your home out, you can still benefit from the $250,000 (or $500,000 if you are married filing jointly) capital gain tax exclusion if you lived in the home two of the previous five years.
Your job gets eliminated.
Nothing can throw a wrench in a retirement plan faster than a job being eliminated or a “forced” early retirement. This is especially true if you had planned on socking away a lot of money for retirement only after your kids finish college and you expect to be in your highest earning years. Instead, consider having your kids take on a bigger role in paying for their education by applying for scholarships, grants and loans. They have 40 years to pay them back, but you won’t be able to get scholarships or grants for retirement. After all, your best earning years may be right now.
Your company sponsored retiree health care plan goes away.
Companies are being forced to eliminate or reduce their employee health insurance benefits for retirees. The expense is so unpredictable that companies just can’t afford to offer it anymore, but the same problem rings true for retirees. It’s best to plan around the premise that company paid or subsidized retiree health insurance won’t be available at all. That may mean you or your spouse having to work at least part time at a company that offers health insurance until you qualify for Medicare at age 65.
If you still have a lot of time until retirement, check to see if you have access to a health insurance plan with a health savings account. You can make pre-tax contributions to the account, and funds used exclusively to pay for qualified medical expenses are tax free. Funds not used for qualified expenses are subject to income taxes, and if used prior to age 65 are also subject to a 10% additional tax.
I have found that when a project goes smoothly, it is usually not due to luck. On the surface things look smooth, but behind the scenes the team has contingency plan A, B and C ready just in case. The housing market may return to a place where selling your home at a decent price isn’t an anomaly. The job market may turn around as employers feel more confident in hiring staff to grow their businesses. Health care may not be as expensive as you suspected. On the other hand, there could be some other random event we haven’t considered; you know, like an earthquake in Washington, DC.
Liz Davidson is the founder and CEO of Financial Finesse, the leading provider of unbiased financial education for employers nationwide, delivered by on-staff CERTIFIED FINANCIAL PLANNER™ professionals. For additional financial tips and insights, follow Financial Finesse on Twitter and become a fan on Facebook.
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