Spring 2008 – Special Edition: Money Tips for All Ages
After You Retire: Managing Your Expenses on a Fixed or Reduced Income
Once you've retired, you finally have the opportunity to work at your dream job — keeping yourself happy. It's your chance to visit places you've always wanted to see, take up a new hobby and spend more time with your family and friends. But to be successful at this new position, you've got to make the most of your income and investments. Here are suggestions.
Make it easy to manage your money and pay the bills. One way is to have your Social Security benefits, pension payments and other income automatically deposited into your bank account each month. "Direct deposit isn't just safe and reliable — it also ensures that you don't need to schedule your activities around a visit to the bank just to deposit your funds," said Susan Boenau, Chief of the FDIC's Consumer Affairs Section.
Signing up for direct deposit of Social Security or other government payments is easy and free. Contact the U.S. Treasury Department's "Go Direct" hotline at 1-800-333-1795 or visit www.GoDirect.org.
Make it easy to manage your money and pay the bills. One way is to have your Social Security benefits, pension payments and other income automatically deposited into your bank account each month.
While there are potential benefits to reverse mortgages, they don’t make sense for everyone. Among the reasons: The fees can be high. You still will be responsible for maintaining the house and paying property taxes. And, your beneficiaries won’t inherit the full value of the house.
Banks also offer quick and easy money-management and bill-paying services by telephone or online by computer, usually for free or at low cost. With telephone banking, you can monitor your account balance, find out if checks or deposits have cleared, or transfer money between accounts at the same bank. If you have a personal computer with Internet access, you can do your banking and bill paying online 24 hours a day, seven days a week. Be sure you know about any fees.
Look for banking services geared to older consumers. Find out if your bank has special accounts, clubs, discounts, events, publications or other services for senior citizens, sometimes including people as young as 50. Comparison shop among several banks to get the best package of services to meet your needs.
Consider a second career or working part-time. "Working longer, even part-time, can allow you to increase your savings and may boost your retirement income," added Boenau. "That alone could also enable you to delay or reduce withdrawals from your savings to cover living expenses."
But if you already are collecting Social Security benefits, find out if income from a job could reduce what you are entitled to collect from the government. Likewise, understand if going back to work could reduce any benefits from an employer's retirement or pension plan.
Be careful with credit cards. You'll probably find that credit cards in retirement are just as necessary as they were when you were younger. But be cautious with your credit cards. If you carry a large balance, you'll pay a lot of money in interest charges for a long time. If you have many accounts and get too deep in debt, your credit record could be damaged, which means you would have a tougher time getting the best deal the next time you apply for a loan, insurance or an apartment.
Another problem with having numerous credit cards is that if you're not closely monitoring your accounts, you can forget to send a payment (and incur late fees and additional finance charges) or you may not notice if a thief has stolen one of your cards and made purchases with it.
Understand the pros, cons and costs before borrowing money with a "reverse mortgage." This is a type of home equity loan — a way to get cash by borrowing money using your home as collateral . But there are some important differences between a reverse mortgage and the traditional home equity loan.
First, a reverse mortgage is available to homeowners age 62 or older. Second, you don't need an income to obtain a reverse mortgage. And third, you don't need to pay back what you owe until you move out of the house, sell the property or die.
While there are potential benefits to reverse mortgages, they don't make sense for everyone. They generally are not advisable if you plan to stay in your home for less than five years or need extra monthly income for relatively small expenses. Among the reasons: The fees associated with reverse mortgage loans can be high. You still will be responsible for maintaining the house and paying property taxes. And, your beneficiaries won't inherit the full value of the house. They will have to pay off the loan either by refinancing or selling the house.
Also be aware that some unscrupulous individuals or companies have promoted reverse mortgages that were not in the consumers' best interest or that involved extra payments for unnecessary services.
For example, there have been reports of companies attempting to sell questionable home repairs or investments in connection with a reverse mortgage, or they charged a fee for information about reverse mortgages that is available for free from the U.S. Department of Housing and Urban Development (HUD) or other sources. One problem with using any loan product to fund an investment is that you could lose money on the investment and still owe on the loan.
How can you protect yourself? As with any loan you're considering, do some research using information from neutral, unbiased sources, such as HUD. If you later decide that a reverse mortgage is right for you, contact several reputable lenders and read and understand all documents and contracts, perhaps with the help of an attorney you trust, before you agree to anything.
For help or guidance regarding reverse mortgages, go online at www.hud.gov/buying/rvrsmort.cfm or contact a HUD-approved housing counselor by calling toll-free 1-800-569-4287. Also, to receive a reverse mortgage insured by the Federal Housing Administration (FHA), you must first speak with a HUD-approved counselor, who can help you determine if the program meets your needs.
Do your research before purchasing "variable life insurance" or a "variable annuity." Both products are part insurance and part securities.
The first is a type of "whole life" insurance product (also called "permanent life" insurance) for which the policyholder's cash value is invested in one or more portfolios of securities.
The second product is an annuity, for which the consumer invests, through the insurer, in a variety of investment options, typically mutual funds.
Insurance companies issue both products, and anyone who sells them must be registered under state insurance laws and state and federal securities laws.
Although these products provide tax-deferred earnings, you can lose money investing in them. Income and value can move up and down. That's what the "variable" in the name means.
These products also may carry relatively high sales commissions, fees and "surrender charges" if you withdraw money early, typically within the first five to eight years after purchasing the product but sometimes after a longer period.
So, think of variable annuities as long-term investments that can tie up your money for many years. The older you are, the less likely a variable annuity is suitable for you.
Of special concern is that securities and insurance regulators have reported an increase in unsuitable sales of variable products to older investors, who experts say should generally stick to low-risk, low- or no-fee financial products instead of those with potentially high risks and fees.
"Before you invest in a variable life insurance or variable annuity product, be sure that you fully understand how the product works, the risk of loss, and the applicable fees and surrender charges," said Victoria Pawelski, an FDIC Policy Analyst. "Carefully evaluate whether the product is suitable for you given your investment objectives and time frame. And beware of high-pressure sales tactics from sales representatives who may have an incentive to generate high commissions and fees."
For more information about insurance and annuities, the National Association of Insurance Commissioners has a Web site (www.insureuonline.org) that includes a special alert for seniors on annuities. The NAIC also provides information on how to contact your state insurance regulator to verify that a company and an individual agent are licensed to sell in your state.
For additional guidance about variable annuities and what to consider before buying, the U.S. Securities and Exchange Commission has published investor tips at www.sec.gov/investor/pubs/varannty.htm.
Also consider going to the Web site of the Financial Industry Regulatory Authority (www.finra.org), the largest non-governmental regulator of securities firms operating in the United States. It publishes investor alerts and provides background and disciplinary information about securities firms and brokers that sell these products.