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Dana Anspach

Plan B

By February 12, 2014

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I remember running a retirement plan for someone years ago and saying, "This only works if everything goes just right."† I don't know what your life has been like, but in mine, it is not often that everything goes just right. Some things do, for awhile. But most of the time life is about adjusting to things you didn't plan on.

Retirement isn't all that different. Something is going to come up that you didn't think of. And when it does, you better have a Plan B.

In the Retirement Management Analyst designation, we learn to account for Plan B by holding reserves for potential household shocks. This means not every dollar you have should be designated as available to provide retirement income. Some money should be set aside. It is part of your Plan B.

I also like home equity and reverse mortgages as Plan B. Reverse mortgages have an unwarranted bad reputation. They are a great tool when used in the right situation. †(See Reverse Mortgage Pros and Cons.)

Lots of people with decent equity in their home count that equity in their mind as part of their retirement assets. I don't like to do that unless it really makes sense - such as if the home is quite large and you know for a fact you will be downsizing.

If you have a modest home that is paid off, I like to think of that asset as Plan B. If you are healthy and need income later in life it might be tapped through a reverse mortgage. If you are unhealthy and need medical care, the home may be sold to unlock the equity. (Still have a mortgage? Read Should I Pay Off My Mortgage.)

So that's my preferred strategy for Plan B. What's yours?


February 13, 2014 at 1:44 pm
(1) Jim G says:

Dana; Thanks. I really like your plan B / home equity as a backup for health care or other financial surprises, and will consider it my own now. I had been wondering how to treat home equity in my retirement calculations. Great idea.

Now; a Spouse Social Security item to confirm or correct:: Assuming my wife and I both begin SS payments at age 66, I believe she will receive 50% of my benefit. This is a retirement payment, not a Survivor benefit. Correct? So together, we will receive 150% of my own monthly SS amount as long as we both live.
Many thanks again, Jim G

February 19, 2014 at 7:29 am
(2) shawn h says:

I retired early and knew that I needed two plan Bs – One for the first 14 years until I reached age 62 and one for later years. For the first 14 years Plan B was “I can always go back to work”. Often times advisers neglect to acknowledge that a young persons greatest asset is himself.

Now I’m 62, Plan B is “I can always collect SS”.

I think that anyone that can and does wait to age 70 to colect SS doesn’t need to worry about plan B anymore.

February 19, 2014 at 6:09 pm
(3) Jim G says:

Dana; A question on Plan B- Home equity for late-life-surprises;
What is a reasonable compounded growth rate for real estate ? I have read US real estate has average growth of 10%/year for the past 100 years. For future planning, assuming a paid off mortgage in 15 years, is it fair to apply a 5-10% compounded growth to estimate the value of the home as an asset in 15 years? Thanks again, JimG

February 19, 2014 at 7:32 pm
(4) Dana Anspach says:

Jim G, I would not assume real estate inflates at a rate any higher than inflation, so I would use 3%. You can access historical home price growth rates from Yale Professor Robert Shiller’s website at http://aida.wss.yale.edu/~shiller/data.htm. They have not been 10% a year. – Dana

March 23, 2014 at 5:27 pm
(5) Jim G says:

Dana; Thanks. Yes, I had also concluded the conservative approach using the same rate of inflation as is used by the retirement calculator makes sense. Still a good idea to have the concept of real estate as long tern care/ planB to lower concern about that care question. I am thinking a reverse mortgage would be a possible vehicle for that . Yes? And please point to good reads on Long Term Care coverage.
Many thanks again, Jim G

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