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Making a Financial Planning Difference
At the recommendation of an existing client, Larry and Lois became clients of Weingarten Associates in early 2005. Larry was 60 years old, and Lois was 59. They had a modest income, a very modest investment portfolio, and like many folks, a fair degree of liabilities including a mortgage, two auto loans, and a small credit card balance. It was very clear that the idea of Larry retiring at age 66 (normal retirement age for purposes of receiving Social Security) was completely out of the question. The big question and the question that many of our clients have: how long will I need to work so I can live comfortably the rest of our lives?
This question comes to us in many forms, but at the core, "Do I have enough to live on?" is the one question that we most often have to answer for our clients. In the case of Larry and Lois, given their overall situation, it was clear that we had some work to do, and more importantly, they had some work to do.
First, they needed to prepare themselves to significantly change how much they save. Frankly, given their ages, they simply did not have enough time to save and build a large investment portfolio that would provide the necessary income they would need in retirement. But, they still needed to save more than they had been.
Second, they would need to work longer than they had initially planned.
Third, and most importantly, Larry was going to need to delay Social Security retirement benefits to age 70.
All of this was communicated and they were ready to give it a go. They increased their savings rate to 20% of Larry's income. Lois worked part-time and did contribute to her 401k up to the match. As mentioned earlier, they knew that this alone was not going to be enough. So, they committed themselves to working past age 66, and to delaying Larry's Social Security benefits until age 70. Why delay Social Security benefits to age 70? As discussed in previous blog posts, delayed retirement credits increase one's benefit by approximately 8% per year on top of the cost of living adjustment between age 66 and age 70. If inflation is running 2% per year, then you are looking at a 10% per year increase in your benefit- for life! As an added bonus for married couples, if Larry (in this case) predeceases Lois, then Lois gets to step-up her benefit to Larry's much larger benefit.
After running retirement projections with these new assumptions it was clear that Larry was going to have to work until at least age 67 and potentially age 70. We continued running these projections each year. Of course in 2008-2009 the market had a bit of a correction as you may remember, and this certainly impacted our projections at the time. After the market rebounded it was looking as if age 68 was going to be the winning age for retirement for Larry with the one caveat that he would still need to earn some money through some consulting he had begun on the side.
Then I received a call from Lois that threw the whole plan into question: Larry had it with a new boss at work and decided to 'pack it in'. He up and resigned. At age 66. That was NOT the plan. Lois was furious and quite nervous. What were they going to do?
We had just had a meeting a few weeks prior so I knew their situation and it was fresh in my head. The portfolio was certainly not large enough to carry them through to age 70 which was when I had wanted Larry to begin Social Security. Starting Social Security benefits at age 66 would not cut it either as it would not provide enough income. They would need to dip into their portfolio in such a way as to exhaust the portfolio very quickly. There was only one answer: a reverse mortgage.
While I had never been a big fan of reverse mortgages in general due to their perceived (and sometimes very real) high costs, the reverse mortgage had a two-fold benefit to Larry and Lois. First, it would reduce their monthly expenses. They had enough equity in their home that the reverse mortgage would pay off their existing mortgage and their line of credit. (We had consolidated their auto and credit card debt into a small line of credit). This would eliminate these fairly large monthly payments. Second, the reverse mortgage would provide its own line of credit that Larry and Lois could use as tax-free income to meet expenses. In essence, the reverse mortgage was going to provide a 'bridge' to age 70 when Larry could begin receiving his much larger Social Security benefits. Finally, while not completely necessary, I encouraged Larry to ramp up his consulting business. He did not need to earn a lot. Even as little as $10,000/year would do.
Here we are 15 months after Larry decided to 'call it quits' and I am pleased to report that their plan is back on track. So much so that they have not even needed to tap the reserve line of credit that the reverse mortgage is providing them. Larry has earned more than he anticipated consulting and they have tightened their belts a bit. But more importantly, Larry is not stressed, has more time for his hobbies, and can even take naps in the afternoon! And Lois? She quit her part-time job which had her on her feet quite a bit and is happy that her husband does not have the stress he used to have. Most importantly for Lois, as she recently wrote me, she and Larry now do not have to worry about moving in with their children during retirement!
Larry and Lois are not the real names of these clients.