11/9/2012 7:45 PM ET|
Retirement planning if you're broke
3. Consider bankruptcy
If you're using retirement savings to pay debts, stop right now. "The credit card companies are going to be able to survive. But it's kind of an open question whether you will," says Weston.
Weston's rule of thumb: Get help if your debts equal half of your income. She suggests finding a credit counselor through the nonprofit National Foundation for Credit Counseling and a bankruptcy attorney from the National Association of Consumer Bankruptcy Attorneys.
Many older people have a particularly strong a sense of honor. They may spend retirement savings or drain home equity to keep paying unmanageable debts. Many of them don't realize that their 401k accounts and individual retirement accounts are protected from creditors in bankruptcy, says bankruptcy attorney Billy Brewer, Jr., the president of the NACBA.
Brewer also tells his Raleigh, N.C., clients to throw in the towel if they're using credit cards to pay bills.
"I would say seniors are the primary demographic that wait too long," he says. By filing for bankruptcy sooner and protecting retirement savings, they'll have more savings to protect them from poverty in old age.
Bankruptcy laws are complex. You'll need an attorney. There are two types of bankruptcy, Chapter 7 and Chapter 13. Brewer charges, for example, $1,500 to $2,000, on average, for Chapter 7 and $3,000 for Chapter 13. An initial consultation with a bankruptcy attorney often is free or discounted.
In Chapter 7 bankruptcy, your debts are erased and you're allowed to keep "exempt" property, including a car, retirement accounts and household furnishings.
Home equity is exempt, too, which is why it's a mistake to use it to pay debts. However, the amount of home equity that you're allowed to keep varies widely. In North Carolina, for example, the limit is $35,000, in Massachusetts, it's $500,000, and Florida has no limit.
With Chapter 13, which may be the choice if you have more home equity than your state protects, you agree to a repayment plan spanning a maximum of five years. Afterward, the remaining debt is forgiven.
To rescue your retirement, take a hard look at income and living expenses. You'll have more choices if you act early. Choices are usually more limited when your back is against the wall.
Start with housing, probably your biggest expense. Consider new possibilities -- selling your home and renting, for instance. Or buying a smaller, cheaper home. Or inviting a renter to share your home and help generate some income.
Vernon says his daughter, when she was a student, rented a room in an older couple's home. They enjoyed each other's company and looked out for one another.
PulteGroup, a homebuilders company, surveyed 1,000 homeowners and found that a third were expecting parents or adult children to move in at some point. If inviting family to live with you is not the solution, maybe you can move in with them. Or share a home with friends.
Happiness at this stage of life means aligning dreams and expectations with reality, says Mary A. Brooks, owner of Brooks Financial Planning in Colorado Springs, Colo.
That's not to say it's easy. "It may mean moving from a high-cost-of-living area of the country, selling cherished assets, and exploring the reality of Medicaid and subsidized senior housing," Brooks says.
5. Get stellar advice
Most financial planners focus on investment planning -- accumulating a big nest egg and then safeguarding and deploying it. If you're retiring broke or nearly so, investment advice isn't very useful to you.
Your best bet, if you have a tiny nest egg, is to avoid advisers who charge commissions and fees for assets under management. Look for those who charge a flat hourly or per-project rate at the Garrett Planning Network and the National Association of Personal Financial Advisors. What's more, you should find one with experience helping others who're retiring on a budget.
"A lot of planners are focused on the accumulation phase and may not have much experience with actual retirement issues. So I'd ask them who their typical client is and whether they've worked much with retirees or near-retirees," Weston says.
Vernon looks for one of three credentials: certified financial planner, chartered financial analyst or a certified public account who has earned a personal financial specialist designation. The industry is full of various credentials, some of which are worthless. Ask friends who have issues and finances similar to yours for referrals to advisers they have used.
Interview candidates, asking specifics about their experience with issues like yours and ask for references, again, from clients with issues similar to yours. Thoroughly understand the fees.
As Celia Brugge, a Memphis, Tenn., certified financial planner, tells some of her clients, "It's not that you will never be able to retire at all. However, it may look different than you anticipated."
More retirement articles and advice:
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Taking SS early is a great option and one I bet the government will stop allowing once it really catches on. Let's talk about health and energy. As a retired friend of mine says: "If you think you're going to be traveling the world in your 70's and 80's your fooling yourself." Take the SS early and travel and pursue your other high-energy activities in your 60's. We also should need less money the older we get as we become more sedentary.
As a counterpoint, perhaps it does makes sense to take SS later if you enjoy working or have to work into your 60's.
Thanks doc. Already downsized last year. One bedroom about 12x12, a little kithchen/dining area and one tiny bath. Probably 625 sq ft at most. $550 @ month and utilities. Dial up internet $4.95 @ month. Its hard to believe I went from 3br 2 ba home with in ground pool double garage and full basement to here lol. Oh yeah....20% down conventional fixed rate mortgage (not a sub prime) and a great buy at 149k. All that and the improvements made, the down payment, and 7.5 yrs of spotless $935 @month morgage payments gone. Along with life savings and the wife. I like the resource pooling idea and breifly thought about that at one time. Maybe I should follow up on it a bit.
I just am so tired of slipping backwards two steps for each step forward. The heart attack almost done me in and now I fear of losing my job to outsourcing. It just keeps getting better lol. Take care friend..god bless.
Retirement is all about cash flow! If you can't maintain (inflation MUST be factored in- look at what the price of groceries and gas has done in the last 3 years) a reasonable cash flow to cover your living expenses. Social security (modest annual COLA adjusted), any pension income, IRA investment income, AND possible part-time employment income all combine to provide your living capital. Annual surpluses provide "fun" money or set-aside savings, shortfalls equal a reduction on your savings that may not be made up down the road. Everyone's situation is different so only you know your numbers. The items in this article are a good starting point.
Greatest factor is a paid for house- no rent or mortgage payment is critical to getting by, but if you can rent modestly (be careful of downstream inflation risk) instead of paying huge amounts in property tax, maintenance, condo fees, utilities (middle floor garden apartments can be cheap on heating/cooling), etc. then it may make sense to rent.
Set realistic goals/expectations regarding your retirement and it can be done!!!
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Saving just a single month of expenses may take longer than you think. See how your savings rate affects how quickly you can build a solid emergency fund.
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