A Hail Mary Retirement Plan for Those With Nothing Saved

You’re rounding the corner toward retirement age with not nearly enough set aside.

We tell young people to start saving for retirement from their first job and not to quit, because even small sums can grow staggeringly large with enough decades of compound returns. But maybe you bumped along from paycheck to paycheck, never saving much. Or maybe you tried to save but got slammed with unexpected setbacks like a late-in-life job loss.

Let’s be clear: You can’t make up for lost time.

But don’t give up — you do have options. Any money you can set aside can help you make retirement more comfortable. Here’s what you need to do:

Redefine retirement

This means working longer, working part time in retirement or both. You’ll have more time to save, your savings will have more time to grow, and you’ll shorten the full-retirement period you’ll need to cover. That’s a nice way to say you’ll have fewer work-free years before you die.

If working longer in your current job feels like a death sentence, start looking around for paying gigs you might enjoy in retirement. Working longer may have an upside: People who voluntarily work in retirement often say their jobs keep them active and engaged.

If you start taking Social Security benefits before your full retirement age — which is currently 66 and rising to 67 for people born in 1960 and later — the “earnings test” will reduce your benefit by $1 for every $2 you earn over a certain limit ($15,720 in 2016). That reduction will end when you hit full retirement age.

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Delay Social Security

The benefits of waiting are so great that it may be worth tapping whatever retirement funds you have so you can hold out until your full retirement age. If you sign up at age 62, you’ll lock in a permanently reduced check.

Most people are better off delaying their application at least until their full retirement age. That would inflate a $1,500 monthly benefit to at least $2,000. If you waited until age 70, when benefits max out, the same check would grow to about $2,640 each month.

If you’re married, it’s particularly important for the higher earner to put off applying for as long as possible. When one of you dies, the survivor will get the larger of the two benefits you received as a couple. Maximizing that benefit can help keep the survivor’s final years from being a financial nightmare.

Rule of thumb: Every year you wait past age 62 adds about 7% to 8% to your eventual benefit.

Tap the value in your house

If you have substantial home equity, you have a powerful asset to deploy for your retirement. You can:

• Downsize now so you can invest the money freed up from the sale and from lower housing costs. The big advantages to doing it now: Your money will have more time to grow, and you may be better able to handle the disruption of a move than when you’re older.

• Downsize in retirement, when you can relocate someplace with a lower cost of living. Your job may require you to live in an expensive area, but once you retire you can choose to live somewhere cheaper within the States or, as about 1 million U.S. retirees do, abroad.

• Consider a reverse mortgage. Reverse mortgages can give you a lump sum, a stream of monthly checks or a line of credit you can tap as needed. You don’t make payments, but the debt grows over time and is paid off when you move, sell or die. The earliest you can apply is 62, but the longer you wait, the more money you can get.

New Jersey resident Walt Lukasik, 60, is investigating this option to salvage retirement plans that were upended by his wife’s cancer diagnosis 15 years ago. She hasn’t been able to work for the past eight years, and medical bills have sucked away any money they’d hoped to save, Lukasik says.

The combination of caregiving and worrying about retirement is taking its toll. “It’s killing me,” he says.

If he applies for a reverse mortgage in two years, it could pay off the $75,000 balance on their current mortgage and give them a monthly payment of about $390, according to the National Reverse Lenders Mortgage Association. If he waits until the mortgage is paid off in five years, the monthly payment would be closer to $800. Other payout options include a lump sum of $93,000 or a line of credit of more than $160,000.

Reverse mortgages are complex and can be costly, so they’re not a good fit for every situation. Counseling is mandatory and typically provided by nonprofit credit counseling agencies.

Turn to your kids

Most U.S. parents are horrified by the notion of asking their children for money. Their kids often don’t feel the same way. A recent survey by Fidelity Investments found nine out of 10 parents think it would be unacceptable to become financially dependent on their offspring, but only three out of 10 adult children agreed with them.

If there’s any chance you may need your children to help you make ends meet, consider having the conversation sooner rather than later. Bringing up the issue may be painful and embarrassing. But at least you’ll know whether you can rely on their help, and they will have time to rearrange their finances to better offer it — while, of course, saving for their own retirement.

Explore public benefits

If worse comes to worst, Social Security alone can keep you above the poverty line — that’s why it was invented. You also may qualify for public benefits, such as subsidized housing, food benefits and lower-cost utilities. Start your search at Benefits.gov.

Re-examine your debt

If consumer debt such as credit cards, medical bills and unsecured personal loans totals half or more of your gross income, explore your debt-relief options, including talking with an experienced bankruptcy attorney. You may be better off saving that money than using it to chip away at debt you can’t ultimately repay.

Save, save, save

You don’t need a fortune. You do need a way to deal with an emergency or the flexibility to time your benefits better. Anything you can save will give you more choices in retirement. Having $10,000 in a savings account could pay for a new furnace or an unexpected medical bill. Boosting your savings more could allow you to delay Social Security or the start of a pension to get bigger checks.

Power save

This option is a long shot, but it may work for those with sufficient income to make a last, aggressive push to save for retirement.

You may be able to save a big chunk of your income if you’re entering the empty nest years and can funnel into retirement accounts money that you used to spend on raising and educating kids. Or maybe you’re just determined to slash expenses and buckle down to serious saving.

Let’s say you earn around $45,000. According to Social Security, your benefit at full retirement age will replace roughly 40% of what you make, or about $18,000 a year. Saving 20% to 30% of your income during your last 15 years of work could give you a nest egg big enough to prevent your lifestyle from falling off a cliff in retirement. (This assumes that you can manage a 6% average annual return, inflation averages 3% and that you’ll live on about 60% to 70% of your pre-retirement income for 20 years.)

If you’re able to pull this off — and that’s a big if — you can go a long way toward closing the retirement gap.

Liz Weston is a columnist at NerdWallet, a personal finance website, and author of “Your Credit Score.” Email: [email protected]. Twitter: @lizweston.