How to recover from financial hardship in retirement

Americans can live a long time in retirement, so it makes sense to prepare for financial shocks.

  • By Brian O'Connell,
  • U.S. News & World Report
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Most retirees eventually experience a financial hardship. It could be a divorce, a serious illness or injury, a severe stock market plunge or seeing a family business go under. Some advance planning can make it easier to recover from a financial setback.

Here are some common ways to deal with financial hardships in retirement:

  1. Remedy your situation.
  2. Build an emergency fund.
  3. Ask for financial help.
  4. Create a wealth account.
  5. Take out a 401(k) loan.
  6. Use a reverse mortgage.

Remedy your situation

Depending on the nature of the hardship, you might be able to take steps to improve the situation. You could go back to work for a period of time. “Earning more income could be to get another job or start a side gig that can earn money,” says Brendan Sheehan, managing director at Waymark Wealth Management in Marlborough, Massachusetts.

Another way to increase your income is to improve your investment strategy. “Earning a better rate of return on your assets often means seeking more aggressive investments in your portfolio,” Sheehan says. “Often retirees keep more cash than they should and ultimately earn a lower rate of return than the rising cost of living. I call this losing money safely.”

Reducing expenses can also help your savings to last longer. One way to realize big savings is to move to a less expensive town or city.

Build an emergency fund

It’s not always easy, but a good way to combat unexpected expenses in retirement is by creating an emergency fund. “The fund should contain at least three months' worth of living costs in case of an unforeseen event such as unemployment or sudden medical expenses,” says Tommy Gallagher, founder of Top Mobile Banks in Berne, Switzerland.

Ask for financial help

Many people turn to family and friends in times of financial need. You can receive gifts of up to $16,000 completely tax-free. In 2023, that figure rises to $17,000. If you work out a loan with a family member, make sure you spell out the conditions necessary to fulfill the terms of the loan.

Create a wealth account

If you find out that you have come out a little ahead at the end of a given month, you can put aside those funds for the future to help absorb a financial shock down the road. “This account can be a passbook savings account, and it's only designed to catch money that’s left over at the end of the month,” says Chuck Czajka, founder of Macro Money Concepts, a financial advisory firm in Stuart, Florida. “Then establish how much of that should be put into an emergency fund of six months or more using the assets you’ve accumulated in the wealth account."

Take out a 401(k) loan or a personal loan

A personal loan from your bank or a 401(k) loan can help alleviate a tough situation. “If you plan on borrowing to ease a financial hardship, you must also have a plan to pay it back, or you're just trading one hardship for another,” says Brandon Ashton, director of retirement security at Cornerstone Financial Services in Southfield, Michigan. “A part-time job and a reduction in excess expenses can also go a long way in both preparing for and getting out of a financial crisis."

Leverage a reverse mortgage

If the financial hardship is onerous, you can consider a reverse mortgage as a last resort. The most common type of reverse mortgage is a loan insured by the Federal Housing Administration, which is also called a home equity conversion mortgage. “It allows seniors 62-plus to access home equity and turn it into cash,” says Edward Herda, vice president of brand strategy for American Advisors Group in Irvine, California. “Borrowers choose a reverse mortgage because it allows them to remain in their home, as long as they meet the loan terms, and provides funds that can greatly supplement their retirement income.”

Seniors can use a reverse mortgage to free up cash to cover other important expenses. “The proceeds can be used in various ways, like paying health care costs or financing home renovations," Herda says. "A reverse mortgage helps seniors cover unforeseen expenses.”

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