How to Recover from a Pre-Retirement Financial Crisis
If you're close to retirement, the pressure is on because you don't have much time to bounce back from something like a job loss or divorce.
Having a personal financial setback when you're closer to retirement can be doubly stressful. You’re dealing with both the financial reversal, and the realization that you have less time to earn the money back.
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Perhaps you had to deal with a job loss, an expensive illness, divorce or a business failure. Or it may be that you just haven't saved enough or you've racked up too much debt to retire.
Take Action Now: Your First Steps
How do you turn your financial life around?
- Start by facing the reality of your situation. This may be easier said than done, especially when you'd rather avoid the anxiety and guilt from facing up to the reality that you are not financially prepared. However, this is necessary to give you the motivation and discipline to follow through. It may even be worth considering an accountability partner, whether a professional counselor or a trusted friend.
- You must create a budget to help establish a positive cash flow as the next step. If you’re spending more money than you earn, you'll need to cut back on your spending immediately.
- Go further, if necessary. If you've made cuts and your monthly income still isn't enough, you'll need to figure out a way to cut your fixed expenses and/or increase your income. This could include anything from switching a newer car to an older one to eliminate a payment to getting a night job at the local grocery store.
Tackle Your Debt
In many cases debt is one of the reasons why you're facing a financial crisis.
To start reducing your overall debt, tackle the one account with the highest interest rate first, then the next highest and so on. Come up with a doable plan that can eliminate the debt over three to seven years depending on the monthly payment you have worked out in your budget.
You might also consider restructuring your debt. This involves negotiating new repayment terms with creditors so you can meet your monthly expenses and pay off your debts within a time period that’s agreeable to all. Deal directly with creditors rather than collection agencies as much as possible as it will cause less damage to your credit score. Explain your money situation, take notes and get written confirmation of any settlement you reach.
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Work on Bringing in More Cash
There are a number of financial strategies that you can consider to improve your cash flow, depending on your age and circumstances.
You could look for a higher-paying job, or a second part-time job for extra income.
As painful as it may be, you could also consider liquidating unnecessary assets, like a vacation home or an extra vehicle, to help pay off your debt more quickly.
Even if you have to start with smaller amounts, set aside a percentage of your paycheck each pay period to rebuild your cash reserve. This will help prevent a debt relapse the next time you have an emergency.
It may make sense to downsize your home as a cost-cutting measure, or move to a less expensive area, especially if you live in a high property tax state. (See The 10 Most Tax-Friendly States for Retirees.)
Working longer before you retire not only may help your saving and retirement accounts grow, but that’s not the only benefit. It also means there will be fewer years that your nest egg must support you. Working longer might also cut expenses if you can take advantage of employer-sponsored health insurance.
Stick to a Smart Social Security Strategy
Avoiding the temptation of taking your Social Security too early may also be an effective way to help your cash flow when you finally stop working.
If you delay taking it until age 70 for example, instead of your full retirement age, and you live out your life expectancy, in most cases your overall payout will be higher, and the monthly payments may be timed to start when you finally stop working, giving you a better cash flow for your remaining years.
Consider a Reverse Mortgage
If it doesn’t make sense to relocate, you may want to investigate a reverse mortgage. (See The Reverse Mortgage Quiz for more.) You essentially get a loan from a lender, often in the form of a monthly payment during your retirement years, with your home as collateral. The loan doesn't have to be paid back until you pass away or no longer live in your home.
Reverse mortgages do have drawbacks, for example, requiring your heirs to sell your home, unless they can afford to pay off the loan. So, while the pros and cons should be investigated before deciding, they can be another source of predictable retirement income.
While you’re taking steps to recover from a financial setback it may seem counterintuitive, but you need to realize that staying too safe could be a mistake. Being too conservative with your savings can slow the growth of your retirement accounts and the resulting cash flow. For example, you may have a better chance of growing your savings faster if you feel comfortable with the higher risk of a stock and bond portfolio compared with keeping your money on deposit at your local bank.
As you get on track financially, it will be critical to continue sticking with your budget. Failure to monitor expenses in the past may have contributed to your financial crisis today. If you have difficulty either implementing or sticking to a budget, you may benefit from working with a financial professional.
See Also: Are You on Track? Financial Planning Goals for Every Decade of Your Life
About the Author
Mike Piershale, ChFC
President, Piershale Financial Group