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No Going Back

Jonathan Clements

RETIREMENT IS LIFE’S most daunting financial puzzle, not least because many of the decisions we make are difficult or impossible to reverse. To make matters worse, we’re often making decisions we’ve never made before, so we have no real expertise.

What sort of decisions am I talking about? Here are 10 examples.

1. When should I quit work? Needless to say, this is the most important retirement decision. Once you quit the workforce, you not only give up your paycheck, but also your ability to save comes to an end and, indeed, goes into reverse, as you start to draw down your nest egg. Still, there’s always the possibility of working part-time in retirement—something I favor, not just because it brings in a little money, but also because it can provide retirees with a sense of purpose.

2. Should I buy long-term-care insurance? If you purchase traditional long-term-care insurance, you’ll soon find yourself emotionally and financially bound to the policy by the premiums you’ve already paid. Even if the insurer later jacks up those premiums to unaffordable levels, you’ll be loath to drop coverage because of your sunk cost. Hybrid policies exact less of a financial toll if you later have second thoughts and decide to drop coverage, though even these policies can involve a hefty opportunity cost, on top of any actual financial loss that you suffer.

3. Should I downsize? As anybody who has ever sold a home can attest, it’s an expensive process, one you want to do as infrequently as possible. Saying goodbye to your single-family home and moving to an apartment, perhaps in a 55-plus community? That can be a smart move—but your new home may come with a raft of rules that can grate on those who aren’t used to dealing with seemingly petty regulations. Not happy with your new place? Your second thoughts could come with a hefty price tag.

4. Should I move elsewhere? It’s one thing to move to a smaller home. It’s another to move across the country, perhaps to a place with better weather and lower taxes. But what if the balmy weather proves scant compensation for the friends you left behind? Moving back would be costly, and perhaps impossible if you’ve already spent a chunk of the proceeds from selling your previous, more expensive home.

5. Should I move into a continuing care retirement community? These communities—which typically offer independent living, assisted living and skilled nursing all within the same campus setting—often involve a hefty upfront fee. Yes, that fee may be partly or entirely refundable upon death or if you move out after just a few years. Still, if you sign up for a CCRC, it’ll likely be the last big financial decision you’ll ever make, and picking the wrong community would be a costly error.

6. When should I claim Social Security? Among retirement choices, this ranks second in importance, surpassed only by the crucial decision of when to quit the workforce. Many folks claim Social Security early, but that’s often a mistake.

Have regrets? You have two options. First, if you claimed in the past 12 months, you can withdraw your request for benefits and repay the money you received. Second, once you reach your full Social Security retirement age of 66 or 67, you can suspend your benefit and thereafter accrue delayed retirement credits, which will boost your benefit once you restart your monthly check.

7. Should I take monthly pension payments or the lump sum? Among those lucky enough to qualify for a pension, many take the money as a lump sum rather than as regular monthly pension payments. But whichever you choose, there’s no going back. True, those who opt for the lump sum could later buy an immediate fixed annuity and thereby create their own monthly pension. But the monthly payments from the annuity may not be as generous as the monthly payments retirees could have received from their old employer’s plan.

8. Should I annuitize part of my retirement nest egg? I believe immediate fixed annuities are a great way to turn retirement savings into an income stream you can’t outlive, but they remain a profoundly unpopular product. That’s a shame, but I can understand why. If you opt to annuitize, say, $100,000 of your retirement savings, it’s a big, irreversible decision—one that would sting if you got a grim medical diagnosis, say, a few months later.

9. Should I take out a reverse mortgage? Just because you sign up for a reverse mortgage doesn’t mean you have to borrow against your home’s equity. Indeed, some experts advocate setting up a reverse mortgage as a financial backup, in case you start to deplete your other retirement assets or a market swoon means it’s a bad time to tap your portfolio. Still, setting up a reverse mortgage involves hefty upfront fees—a deterrent to pulling the trigger. To see how much you might pay in fees, try this calculator.

10. Should I give away money now or upon death? Whether you’re looking to help family or your favorite charities, giving away money now has a lot to recommend it. You get the pleasure of enjoying the recipients’ gratitude, you shrink your wealth for purposes of federal and state estate taxes, and today’s charitable gifts may also trim your current income-tax bill. The downside: Once the money is given away, it is indeed gone, which could be a financial disaster if you later find your retirement nest egg is shrinking far faster than you anticipated.

When faced with the 10 questions above, the temptation is to opt for the answer that’ll minimize our potential financial loss in the short-term, and thus also minimize the chances that we’ll be racked by regret. But there’s a downside to making the emotionally safe choice. The problem: In some cases, the path that promises least short-term regret—by, say, claiming Social Security right away, taking the pension lump sum and avoiding immediate annuities—could end up hurting us financially over the long haul.

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.

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