Money tips for cash-strapped retirees

Imagine retiring after working hard – really hard – all your life. Your house is paid off in full. So are your vehicles. You’ve always been careful to shun credit-card debt, so you’ve got none of that. Sounds like you’d be sitting pretty at that point, huh? 

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Maybe not.

More and more retirees are struggling to make ends meet in their golden years, in large part because they’re being walloped by the effects of inflation. Several readers in this situation e-mailed me in response to my recent “10 Tips” column about how middle-class families across the country are being squeezed financially. The retirees who wrote in shared tales of an exceedingly stressful middle-class crunch that’s peculiarly their own.

Consider this scenario sent in by a woman in Texas:

“We are retirees in our 70s who have done everything you suggested except to get rid of our second car (a '99 Chevy pickup). We paid cash for our last two cars in '98 and '99 in anticipation of our retirements. Our home is paid for. No credit-card debt. However, our pension and Social Security is not keeping up with the cost of Medicare and (our) AARP (Medicare) Supplement ($500 total for the two of us monthly). Groceries have doubled in the last five years on many staple items. Five years ago we averaged $45 weekly on food and cleaning supplies, (and) we now are spending about $150 weekly, and that doesn’t include eating out. When we do eat out, we usually split an entree.

“Gasoline, electricity and natural gas have all gone out of sight. The cable bill has risen from an original cost of $12 monthly to $78 (which includes Internet service now). We are doing OK now, but if my husband dies my pension will be cut in half. Unless I rent out rooms to single friends, i.e. become a ‘Golden Girl,’ I don’t see how I can make it on income from our savings which are in CDs that are only yielding 5.10 APR (annual percentage rate). We have a little in mutual funds that are gradually rising back to where they were 10 years ago, but income from that is also pretty small. Do you have any suggestions?”

After speaking with financial planners and doing some research, I do have some suggestions to share. I hope these tips are at least a little bit helpful for this reader in Texas and other retirees who are under pressure financially.

1. Diversify your investments. Certificates of deposit, or CDs, are safe — and no doubt that’s why the couple in Texas decided to sock away much of their savings in CDs. While it’s generally true that people’s investment portfolios should exhibit less risk as they age, it’s also true that people are living longer lives — and, consequently, spending more years in retirement — than ever before. For that reason, people’s savings and investments typically have to serve their needs for a long, long time. Thomas Balcom, a certified financial planner with Foldes Financial Management in Miami, Fla., works with many retired clients and advises them to spread their investments over numerous asset classes, no matter how old they are. “We put a lot of different things in the mix,” Balcom said. “We use stocks, bonds, REITs (real estate investment trusts), commodities and some hedging investments. You definitely have a degree of risk there, but generally speaking … this prevents (your nest egg) from being eroded by inflation.” Other inflation-busting investments to consider include I bonds, which are U.S. savings bonds that pay a fixed interest rate plus a rate that changes based on inflation, and treasury inflation-protected securities, or TIPS, which also pay a fixed interest rate and have their principal adjusted based on changes in the Consumer Price Index. For more information on I bonds and TIPS, visit this U.S. Treasury Department Web site.

2. Get help managing your money if you need it. Yes, you can do research and allocate your money into different asset classes all on your own — but the reality is that most people aren’t very good at doing this. “They often get scared of the market and end up selling low and buying high,” Balcom noted. Bearing that in mind, it might actually save you money to hire a reputable financial professional. Whether you use a financial planner, a money manager or a stockbroker, find out how the person will be paid. Avoid working with anyone who will be paid commissions for selling you certain financial products — products that you may not need or that may not be appropriate for you at this stage of your life. You can hire a fee-only financial planner who won’t get paid such commissions through the National Association of Personal Financial Advisors, the Financial Planning Association or the Garrett Planning Network.

3. Beware of the dangers of plastic. The couple in Texas may not have any credit-card debt, but unfortunately more and more seniors do. Some get tripped up by credit cards because they don’t fully understand that money borrowed in this way absolutely must be paid off in full and on time each month. Otherwise, high interest rates and fees can leave borrowers wallowing in debt. In other instances, though, retirees turn to credit cards in desperation because of crippling medical expenses and other costs that can’t be covered by their fixed incomes. If this has happened to you — or if you’re tempted to rely on credit cards to get out of a bind — keep reading. There may be other viable sources of income to tap. Also, consider these words of wisdom from Jan Dahlin Geiger, a certified financial planner in Atlanta: “Put a credit card in your car’s glove box for true emergencies and perhaps put a backup credit card someplace very inconvenient, such as your safe deposit box. Then (survive) on a cash-only basis. … You will be amazed at how much harder it is to buy two new pairs of shoes for cash than it is to charge them. Many people will end up putting one pair back. Don’t believe me? Try it yourself for 30 days. Most people … are genuinely astonished at the difference it makes in their spending.”

4. Think about the roof over your head. If you own your home, you can sell it and make up to $250,000 in profit — or $500,000 if you’re married — without owing any capital gains taxes. After doing that, you could move into more modest accommodations in your area, or, like thousands of Americans, you could relocate to an entirely new part of the state or country that would be much more affordable for you. If you know you want to stay put, though, here’s another option: You could get a reverse mortgage. Such loans allow homeowners age 62 or older to convert home equity into cash without having to move or assume extra debt. If you own your home outright or nearly so, a reverse mortgage can help you financially at a point in your life when you may really need it. Most reverse mortgages require no repayment as long as you live in your home. The loan must be repaid in full, along with interest, when the last living borrower dies, sells the home or moves away. To learn more about this option, read my recent “10 Tips” column on reverse mortgages and visit this AARP site.

5. Wait to collect Social Security. Your Social Security benefits can kick in for you once you turn 62, but you’ll get more money if you wait until your “full” retirement age — (which is 66 for people born between 1943 and 1954). You’ll get even more if you can wait until you’re 67, 68, 69 or 70. Consider this scenario: People eligible for monthly benefits of $1,610 at age 62 would receive $2,190 a month by waiting until age 66 and $2,945 a month by waiting until age 70. Those baseline amounts would be increased in future years to cover upticks in the cost of living.

6. Keep working. To help you in your quest to postpone those Social Security payments, you could continue to work past your retirement age. This notion may sound terrible to you initially, but consider this: The regular routine and companionship you get from your job may be more meaningful to you than you realize. And once you give up your job, it may be harder to get back into the work force than you realize. Because of your experience and maturity, your current employer may go to great lengths to keep you — but a company that doesn’t know you from Adam may not take a chance on you after you’ve already retired. Here’s one approach that could keep some income rolling in while still giving you a break: You could make arrangements for a “phased retirement” and start working part time in your current job.

7. Tap your life insurance if you can. Do you have a cash-value life insurance policy? If so, you could benefit from that policy now while you’re still alive. This could come in handy if you’re strapped for cash and in need of more serious help than your beneficiaries. You can take out a cash-surrender loan — which essentially amounts to a loan that you won’t ever have to pay back. For details, contact your insurer and also visit this site.

8. Save on prescription drugs. As referenced above, medical costs can wreck the budgets of the most frugal retirees — and prescription drugs can play a big role in contributing to the damage. To help combat this trend, Consumer Reports has launched a fantastic free site called “Consumer Reports Best Buy Drugs” to help you identify the least expensive medicines that are effective for certain conditions. What’s more, pharmacy benefit manager Medco Health Solutions recently released a helpful, easy-to-understand guide called “Prescription for a Healthy Nest Egg: Half a Dozen Ways to Lower Your Drug Costs and Stretch Your Retirement Dollar.” You can download the entire guide for free through this link.

9. Seek out property-tax relief. It’s imperative that you find out whether your state or local government offers property-tax breaks for older homeowners. Such forms of relief have been scaled back in recent years in many parts of the country, but if they’re still available where you live, take advantage of them without delay. If you learn that you’ve unwittingly been paying a higher share of property taxes than necessary for some time now, apply for a refund with your tax assessor.

10. Know where else to turn. If it’s obvious that you simply cannot cover your expenses, start the process of tapping into government programs for older Americans on low or fixed incomes. To find out what kind of federal and state support might exist for you, fill out the confidential questionnaire at BenefitsCheckUp.org. You also can track down many more services and resources through the Eldercare Locator, a nationwide assistance directory provided through the U.S. Administration on Aging. Call (800) 677-1116 or visit this site.

Sources and resources:

• AARP
• Consumer Reports Money Adviser
• ConsumerReports.org
• RealEstateJournal.com, The Wall Street Journal Guide to Property
• SmartMoney Magazine
• USA Today
• Financial Planning Association