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September 26, 2011

What do to when retirement plans go awry!

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CRMA’s expert advice for unforeseen events including losing your spouse and when you can’t sell your home

No matter how carefully you’ve prepared for your retirement, some unforeseen events—such as losing a spouse or not being able to sell your home—could derail your plans. This is a special concern if you’re just a couple of years from retirement, when you don’t have a lot of time to recover from negative setbacks.

Many soon-to-be retirees learned this the hard way during the recession and are struggling with hardships including lost health insurance, trouble paying the mortgage or rent, and having used up all their savings.

“In the last three years, we’ve seen that people who prepare for tough times are in pretty good shape when emergencies happen,” said Noreen Perrotta, Editor, Consumer Reports Money Adviser. “To help minimize the blow some of these events could have on your retirement, it makes sense to do some advance planning, just in case.”

The experts at Consumer Reports Money Adviser have compiled ways you can minimize the financial impact of several “what ifs.” The full story is available athttp://www.consumerreports.org/cro/money/retirement-planning/when-plans-go-awry/overview/index.htm and to subscribers of Consumer Reports Money Adviser.

Here are some of them:

You lose your spouse

This scenario is not only heartbreaking, but it can have the most devastating impact on your retirement plans as you have to deal with the death of your spouse and figure out how to adjust to the resulting loss of income.

What to do now. Your plan should include provisions that ensure a surviving spouse will have enough retirement income. For example, if you and your spouse both worked long enough to collect Social Security, a survivor will lose the lesser of those two payments in most cases. For more details go to www.socialsecurity.gov and click on the “Survivors” tab.

You also have to keep in mind that you’ll need to earn even more to maintain your income level because single filers have higher tax bills. If you see that your spouse will suffer a significant loss of income if you die, or if you still have dependent children, life insurance can fill the gap. CRMA generally recommends that people buy term insurance because it is less expensive than cash-value policies. In some cases, cash-value insurance can provide estate-planning and tax advantages. A financial planner can work the numbers with you.

If it happens. If you planned ahead, you should have enough available cash to sit tight for about six months and see whether your estimates were correct or if you’ll need to tweak your budget.

 

As long as property is passed outright to the surviving spouse through a will, trust or by law, it should quality for the unlimited marital deduction and not be subject to estate tax. But the surviving spouse will have to create a new estate plan to minimize any future estate taxes that might occur at his or her death.

You can’t sell your home

It might be your biggest asset, but you shouldn’t expect to make much money by selling it. Historically, real estate has returned less than a percentage point a year since 1960 after taking inflation into account. The amount you can get for your home in the near future doesn’t matter if you have no plans to move anytime soon. But it certainly can be an issue if you’re ready to retire and pull up stakes.

What to do now. Base your retirement assumptions on how much your total savings will be worth, excluding anything you might earn on the sale of your home.

If it happens. You might want to delay selling by a year or two to give the market in your area some time to recover, as long as you can afford to stay in your home. To speed up a sale, make sure your home is priced right. Buyers have lots of homes to choose from today, so a home sells most quickly if its price is just a bit lower than similar homes in the area.

Also covered in the story: what to do if you stop working earlier than expected, your investments tank, and if your kids need financial help.

Consumer Reports Money Adviser is a monthly, subscription-only newsletter that answers tough money questions and provides expert financial advice. Its proven information and successful strategies can make any financial decision an easy one. Each month, CRMA provides feature articles and helpful investment, savings, and spending advice that will help prepare consumers for anything life may bring them. For more information visit: www.ConsumerReports.org.

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