You’ve saved throughout your career in hopes of a comfortable, worry-free retirement. But then something happens — maybe a medical emergency or a wedding — and suddenly all or most of your retirement savings are gone.
What do you do? Although it’s easier for younger people to bounce back, even if you’re at or near retirement age, you can take steps to recover savings. Here’s how.
Step 1: Identify what caused you to drain your savings.
If you’re approaching retirement and not entirely sure where your money went, make a date with your finances.
“Find out why you had to spend from your retirement savings in the first place. Of course life throws you curve balls, but it’s possible to plan for the unexpected,” said Blair duQuesnay, chief investment officer at ThirtyNorth Investments. She suggested having an emergency cash reserve to cover three to six months’ of expenses, or six to 12 months’ for homeowners.
“Do you know the deductibles on your homeowners, flood, car and health insurance? It’s a good idea to keep these amounts in cash as well,” she added.
Not only identifying what happened to your savings but also establishing a fund to avoid having to dip into your 401k in the future will help you have a more fruitful retirement. And don’t forget to build nonrecurring expenses into your monthly budget.
duQuesnay suggested setting aside about 1 percent of the value of your home each year for repairs. You won’t need to get a new roof or take care of a leak every year, but you should still prepare for the expense. Set up automatic electronic transfers from your checking account to various savings accounts so that you’ve already “spent” the money before you have a chance to find other uses for it.
Step 2: Pick up a second job or side hustle.
You might not want to hear it, but if you’ve drained your retirement savings, it’s time to put in extra hours. If your husband or wife doesn’t work, nudge them toward finding work — even a side gig.
“Although this seems contradictory to why we retire in the first place, retirees may have no choice but to seek employment if they run out of funds,” said Sterling Raskie, a financial advisor with Blankenship Financial Planning. “Although not ideal, many bigger companies may hire senior citizens offering decent wages, as well as potential access to healthcare coverage.”
Raskie mentioned that folks over 70½ can continue to save to a Roth IRA with any earned income from employment or self-employment. Additionally, working while receiving Social Security might increase a retiree’s AIME — average indexed monthly earnings — and future benefits.
Working into your retirement years doesn’t have to be a bad thing, either. You can use your free time to turn a hobby into a side hustle. Financial advisor Devin Carroll, founder of the site SocialSecurityIntelligence.com, shared this story of his dad:
“Through lots of unfortunate life events, he found himself ready to retire, but not really able to afford it. However, the lack of money wasn’t going to deter him from enjoying life. He knew just how fragile life could be … just a year earlier we lost my mom to cancer. So, he was determined to retire. He’d always had a knack for building things and especially liked working with Eastern red cedar. He [started] building a few swings, and before long the orders started pouring in. Within a few weeks, he had to start putting customers on a wait list.”
Carroll added that, while the side hustle isn’t making his father rich, it’s helping supplement his other income. He said that he’s seen other retirees taking on side work, from moving lawns to tutoring and sharpening knives.
Step 3: Start saving again little by little.
“Replenish your retirement funds by starting small,” suggested Benjamin Brandt, founder of Capital City Wealth Management in North Dakota. He added you should start by saving 1 percent of your income in your company’s retirement plan.
“You won’t miss 1 percent,” he said. “Increase the percentage an additional 1 percent every other month. In a few months, you will be back to contributions large enough to receive your company’s match, and a few months after that you will be well on your way to rebuilding your retirement savings.
“By starting small,” he continued, “you will ease back into monthly saving and will give yourself time to adjust by increasing your retirement contributions slowly.”
Once you’ve acclimated to contributing to retirement funds, put savings on full throttle. Lorraine Ell, CEO and senior financial advisor with Better Money Decisions, advised you max out contributions to your 401k and IRAs.
“Take advantage of any matching contributions by your employers. This is free money,” she said. “If over age 50, take advantage of any catch-up amounts as well. For IRAs, that’s an additional $1,000 and for 401ks (403bs, etc.), an additional $6,000.”
Step 4: Cut expenses and put retirement first.
Oftentimes, retirement savings are given only enough attention to set up automatic deposits into an investment account. But if you’ve fallen behind, saving for retirement needs to take precedence over other priorities.
“In every family budget, income is allocated to various expenditures,” said Kirk Chisholm, wealth manager at Innovative Advisory Group in Lexington, Mass. “Some take priority over others in matter of importance. Since retirement is one of the furthest out goals, it typically gets a backseat to more near-term goals. However, when you drain your retirement in favor of other priorities, you will need to get back on track by pushing the priority of retirement savings to the front.”
He suggested that, even if you are already maxing out your retirement savings, you need to add more to play catch up. You can find other tax preferential vehicles to save for retirement. Municipal bonds, MLPs and real estate can offer tax-advantaged ways to save for retirement.
Find Out: How Much Money Do I Need to Retire?
Step 5: Delay your retirement and Social Security withdrawals.
Sometimes, you just need more time to make money, and that means delaying retirement and Social Security withdrawals. Christine Benz, Morningstar’s director of personal finance, boiled it down:
“For retirees and younger retirees, generating income is the best way to make a save. For pre-retirees, that means being willing to consider pushing back the retirement date, which delivers a three-fer on the financial front: additional retirement-plan contributions, delayed withdrawals from the portfolio and delayed Social Security.
“For retirees, being able to generate at least some income greatly reduces demands on the portfolio — and also reduces the amount of the portfolio that needs to sit in low-returning asset classes like cash and bonds. Doing so may also help stave off Social Security claiming, and delaying SS is one of the best things you can do to improve a portfolio’s longevity.”
Step 6: Consider a reverse mortgage.
Reverse mortgages allow senior homeowners to access tax-free cash, receiving it in a lump sum or fixed payments — as long as you occupy the home, said Greg Cook, vice president of Reverse Lending Experts.
“Unfortunately, most seniors rely on a reverse mortgage as a last resort,” he said, adding that many financial advisors promote them to help keep seniors from draining retirement savings.
While a reverse mortgage is a viable option to consider, if you’re looking to go down this route, you need to fully understand how a reverse mortgage works to avoid falling into a money pit. It pays to find a reputable lender, too.
That said, a reverse mortgage can be a viable source of retirement funds for seniors with sizable home equity.