And they all lived happily ever after… That’s the popular last sentence in so many fairy tales and nursery rhymes. But if you’re over 30, you’re probably painfully aware that real-life doesn’t usually work that way. Life can be good, but it’s usually punctuated with times of difficulty. And so it will be in retirement. There will almost certainly be times when you will be looking for sources of extra money during retirement to help you cope with those difficulties.
As much as you might want to believe that a large retirement investment portfolio will provide for all of your needs, that’s unlikely to be the case. More likely, your retirement portfolio will provide you with regular income. But when those financial disasters hit, you’ll need to turn to other sources precisely so that you don’t end up draining your retirement portfolio prematurely.
Why You Might need Extra Money During Retirement
If you can come up with a list of reasons why you might need extra capital throughout your life, you probably have a good idea as to what will cause it in retirement. Here are the five most likely that I came up with:
1. A serious decline in your retirement portfolio. Considering that you will be relying on your investment portfolio to provide income for 20 or 30 years, this is more than a remote possibility. A 20-30% decline in stocks will be a serious hit once you retire. A decline of 50% or more could force you out of retirement.
2. Major improvements to your home. One of the problems with keeping a house into retirement is that sooner or later you will need to make major repairs. This could include a new roof, driveway, carpeting, windows, or even plumbing. Each of these jobs could cost many thousands of dollars. Periodic remodeling will cost even more. But much as we prefer to ignore them, they are part of the routine when you own your own home.
3. A rash of medical expenses. No matter how good your health insurance coverage is, there will always be deductibles, copayments, and uncovered expenses. In a worst-case scenario, these can run into tens of thousands of dollars.
4. Buying a new car. In 2015 USA Today reported that the average price of a new car was $33,560. That’s probably a little bit higher now, and will continue to rise in the future. You can take a loan to cover most of the cost, but the debt will reduce your monthly income. It will be much better to pay cash for a new car, than to finance it.
5. Helping your adult children. If you don’t have children, you can ignore this one. But if you do, there’s a better than even chance that you will have to help out financially. This can be as a result of an extended job loss, a divorce, a medical catastrophe, a bankruptcy, or even legal troubles.
If you are hit by any one of these disasters, or one of the many other possibilities, how will you find extra money so that you don’t have to dip into your retirement portfolio?
Keep Your Emergency Fund Well Stocked at All Times
There’s some thought out there that you won’t need an emergency fund once you retire. I’m not sure if that assumption is based on the fact that you can access your retirement savings whenever you need to, or on the fantasy that emergencies simply won’t happen once you retire. But rest assured they will, and continuing the practice of having an emergency fund is the best defense.
The theory of maintaining three months worth of living expenses probably won’t work once you retire. You may need enough to cover a couple of years in the event of a serious decline in the stock market. That would enable you to live out of your emergency fund without draining your retirement savings while they are already low.
An amount of that size would also help in the event of any the other disasters described above. You should also make an allowance in your budget to continue increasing your emergency fund throughout retirement. Financial disasters can happen at any time.
What can you do absent an emergency fund?
Sell Off Personal Assets
Most of us have way more personal possessions than we need or even use. For example, you may have a recreational vehicle or equipment that you don’t use. Or perhaps a second or third vehicle that isn’t absolutely necessary. Maybe you even have vacation property that you rarely go to.
If you need to raise capital, either to deal with an emergency, or to fill an emergency fund, any one of these possessions could be sold to raise instant cash.
A Reverse Mortgage
I’m not a big fan of going into debt, particularly once you retire. But reverse mortgages are becoming increasingly popular as a source of retirement capital. These loans do not come without substantial risks, and you need to be aware of what they are.
There’s an excellent site called Reverse Mortgage Alert that I think does a fair job of presenting both the benefits and the risks of reverse mortgages. Should this option come under consideration, either for yourself or for your retired parents, check out this site to get some third-party information before taking the plunge.
Take a Temporary Job
For a lot of people the whole idea of taking a job after your entire defeats the entire purpose of being retired. I get that, but this is usually a better solution to financial problems than dipping deep into retirement assets. Take a job and hold it only as long as is necessary to cover a major expense. After that, you can leave and go back to your life of blissful retirement.
A temporary job also can be an excellent way to ride out a declining stock market. It will enable you to live at least partially on earned income, so you can avoid withdrawing money from your retirement portfolio. This may be a necessary step in the event that you have not set up an emergency fund for retirement.
Why Any of These Steps May Be Necessary
Let’s take a worst-case scenario. The stock market has plunged by 50%, threatening your long-term status as a retiree. You continue making withdrawals from your retirement portfolio, and that will cause at least three permanent problems:
- The withdrawals will further reduce the value of your portfolio – if the market is down 50% over two years, and you’re withdrawing 4% of the portfolio each year for living expenses, that will result in a 58% decline in your account balance
- Investments sold to cover living expenses in the aftermath of a major decline will effectively lock in permanent losses in those investment positions
- It will be almost impossible to fully recover your portfolio value after sustaining such large losses, which may force you into taking permanently smaller annual distributions for living expenses
On deeper reflection, you may want to consider maintaining some form of earned income throughout your retirement. It’s not a bad idea to get that going now even if you aren’t close to retirement. It will help you perfect the income source between now and then, as well as provide you with an additional income source to fund your retirement portfolio.
There are ways to do this that won’t be nearly as stressful as a regular job. One of them is to take a shot at what I do. You can read about it in The Perfect Side Hustle: Freelance Blog Writer.
That’s just my suggestion. But you probably need to plan on having some form of active income generation capability even after retirement, and even if you never need to use it. The uncertainties of life, in combination with the rising cost of living and the unpredictability of the financial markets requires that we all have some kind of backup plan.
What’s your plan to find extra money during retirement?