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Best Retirement Plans for Self-Employed Workers

As a freelancer, sole proprietor, or small business owner, planning for the future can be a daunting responsibility. This is especially true when it comes to saving for retirement amid inflation and economic uncertainty. If you feel unsure about how to independently fund your retirement, you are certainly not alone. Research shows that fewer than 30% of self-employed workers participate in retirement plans through their job. 

It doesn’t have to be that way, however, because most kinds of traditional retirement plans are still available to the self-employed, as are various other financial products designed for investing in retirement. Of course it’s no easy task to manage these all on your own, but learning about all your options is the best way to start. 

Individual Retirement Accounts (IRAs) 

IRAs are a common type of tax-deferred retirement account, and they are available to anyone. Regardless of your employment situation, you can open an IRA through a financial institution and contribute money on your own — up to $6,500 per year, or $7,500 at age 50 or older. There are two main types of IRA, each offering unique benefits for tax deductions. 

  • Traditional IRA: Contributions are tax deductible up-front, but are then taxed as income upon withdrawal. 
  • Roth IRA: Contributions are not tax deductible, but the earnings are not taxed when withdrawn after retirement. 

IRAs are popular because of their flexibility in investment options. The money in the account can be self-directed or professionally managed among a wide variety of assets including stocks, bonds, and mutual funds. The major caveat to both types of IRA is that funds cannot be withdrawn until the owner reaches age 59 ½, or an additional tax penalty will apply unless certain exceptions are met. 

*Consult a tax advisor

SIMPLE IRA

Short for Savings Incentive Match Plan for Employees, a SIMPLE IRA is a special type of IRA plan designed for small businesses that have employees but do not sponsor any other type of retirement accounts. As the name implies, SIMPLE IRAs are relatively easy and inexpensive to set up, and they offer the advantage of higher contribution limits than normal IRAs.

A SIMPLE IRA works by funding a Traditional IRA with both employee and employer contributions. This means that as a business owner, you can sponsor contributions for yourself and for other employees while deducting those contributions as a business expense.

As an employee, you can contribute up to $15,500 per year (plus a $3,500 catch-up contribution if you are over age 50). As the employer, you can choose to make either a non-elective contribution at 2% of employee compensation or a matching contribution up to 3% of employee compensation. The money in the fund then works like a Traditional IRA, with the same flexibility for management and stipulations for withdrawal at retirement age.

Simplified Employee Pension (SEP) 

A SEP plan, or SEP-IRA, is an alternative to the SIMPLE IRA that allows employers to make flexible contributions to an employee-owned IRA. SEP plans are relatively simple to set up and do not come with minimum requirements for annual contributions. This makes a SEP-IRA attractive for independent contractors or other businesses with irregular cash flow because there is no obligation to contribute regularly. The limits are relatively high, at 25% of employee compensation or $66,000 each year. 

SEP plans are offered through financial institutions and utilize a Traditional IRA structure, meaning they are subject to the same withdrawal and tax requirements. Once established, the SEP-IRA can be self-directed by the employee or managed with the help of the institution. This allows for a lot of freedom in funding and management of the account over time. 

Solo 401(k) 

Much like an employee-sponsored 401(k), a solo 401(k) can help maximize retirement savings for people who are self-employed or are partners in a business with no regular employees. This type of 401(k) plan is also called a one-participant 401(k), individual 401(k), or solo-k. 

Contributions to a solo 401(k) are tax deductible, and the account allows for both elective deferrals and nonelective contributions, with different limits applying to each type of contribution. This means that a business owner can choose how the money will be deducted from his or her paycheck and accounted for by the business. Superior flexibility makes the 401(k) a powerful tool for small business owners to fund their own retirement savings, but these plans come with higher set-up costs than the alternatives. 

*Consult a tax advisor

Annuities 

Annuities are a type of financial product that works much like an insurance plan, and they are typically issued by insurance companies. They are investment vehicles designed to provide a guaranteed, steady cash flow for people during retirement. Annuities are available to anyone regardless of employment, but work best as a supplement to retirement savings rather than as a retirement plan on their own. 

Annuities work in two main phases. The first is the accumulation phase, in which the annuity is funded by either a lump sum or regular payments. The second is the annuitization phase, which is the specified time in the future when the investment pays out. The time in between these two phases is known as the surrender period, when the money cannot be withdrawn without penalties. 

You can purchase an annuity at any age, but they are most useful if you are nearing or past retirement age and want to plan ahead for the possibility of outliving your retirement savings. If you are self-employed and thinking about retiring soon, you may consider purchasing an annuity now to ensure additional income in the future. 

Reverse Mortgage 

Reverse mortgages are a unique way for homeowners to supplement their savings in retirement. These are special loans that convert home equity into cash, as either a lump sum or payments over time. Reverse mortgages are generally best for older people with little or no remaining mortgage payments and substantial equity built up in their home. 

Self-employed or not, if you own your home you may be eligible for a reverse mortgage once you reach the age of 62. Upon applying for a reverse mortgage, the amount you receive will depend on factors like your age, the value of your home, and current interest rates. You can use the loan to pay off any remaining mortgage, and the rest can go toward other needs you have in retirement. 

A reverse mortgage need only be paid off upon the sale of the home or death of the borrower, meaning that your home is not used as collateral while you are alive. This makes reverse mortgages an attractive option for many people, but you should consider your unique situation to decide if a reverse mortgage is right for you. 

*Borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees.

Choosing the Best Plan For Your Situation 

As a small business owner with a lot already on your plate, sorting through all these options for retirement savings may seem overwhelming, especially when you realize that more than one type of investment may be necessary for ensuring a comfortable retirement. That’s why consulting with a professional advisor is always best, but some general guidelines can help you decide what type of retirement plan to prioritize.  

  • A common recommendation for anyone, regardless of employment status, is to open an IRA (Traditional or Roth) and try to maximize your contributions at $6,500 each year. Keep in mind, however, that these funds should not be withdrawn until after you reach age 59 ½. 
  • As a self-employed business owner, if you want to make additional contributions through your business, consider opening a SEP-IRA. This can complement your existing IRA with flexible, tax-deferred contributions and a limit of up to $66,000 per year. 
  • As a business owner with a few employees, you may be able to optimize tax treatment for yourself and your employees by sponsoring a SIMPLE IRA with either non-elective or elective-deferral contributions. 
  • As a self-employed individual with no employees, you may instead choose to set up a solo 401(k), which offers the most flexibility in funding and withdrawal, but may be more complicated and expensive to maintain. 

Your business structure is of course not the only factor influencing your retirement plan. You must also set personal goals such as what age you want to retire and how much money you’d like to have each month. Additionally, you should factor in other possibilities such as purchasing annuities or taking a reverse mortgage loan at some point in the future. 

The bottom line is, the earlier you can start mapping out your options and envisioning your retirement, the more prepared you’ll be when the day finally comes. 

Reverse mortgage borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees.  

This information is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement. 

How ‘Unretiring’ Can Affect Your Social Security Benefits

As retirement approaches, you may worry about whether you’ve saved enough money to cover expenses for the rest of your life. And as inflation and economic uncertainty take their toll on retirement plans, you’re not alone. Unfortunately, because of this growing concern, many people like yourself are finding that they may need to return to work.

According to CNBC, one in every six retirees were contemplating returning to work in 2023. Additionally, the U.S. Bureau of Labor and Statistics (BLS) predicts that the labor force’s 75-and-older population will increase by 96.5% by 2030. Statistics like these set the stage for discussing how returning to work may affect your Social Security benefits.

Before you decide whether to return to work, it’s crucial to understand how that could affect your Social Security benefits. Knowing the details can help you prepare for potential income reductions and plan for retirement.

When Does Going Back to Work Affect Your Social Security Benefits? 

The good news is if you’re over full retirement age (currently 66 if you were born between 1943 and ‘54), you can work as much as you want and your benefits won’t be affected.

For those below this age, the situation is a bit more complicated. If you make over $21,240 annually in earned income, your benefits could be temporarily reduced. However, this reduction isn’t permanent; once you reach full retirement age, your benefits will be recalculated to account for any months that they were withheld.

How To Calculate the Financial Benefits of “Unretiring” 

If you’re considering going back to work, there are several factors to consider before making a decision. One of the most important is your current financial situation. You need to assess whether you have enough savings to retire for good or if you need to continue working for a few more years to supplement your income.

If you’re close to retirement age, it may not be worth it to unretire. Your Social Security benefits may be reduced if you earn income while receiving them.

Other important factors to consider:

  • Your health and energy levels. Are you physically able to continue working?
  • The availability of jobs in your field. Is there a demand for the skills you possess?
  • The potential earnings from returning to work. Will it really make financial sense for you to unretire?
  • The impact on your retirement lifestyle. Do you need to make any changes to accommodate going back to work?

Weighing these factors can help you decide if unretiring is worth the time, money, and effort.

How To Supplement Your Income Without “Unretiring” 

While you may feel like you need to return to work, there are other ways to supplement your income without affecting your Social Security benefits. While each option has its pros and cons, they can be viable alternatives to working full-time and can help in varying life situations.

Deferred Annuity  

A deferred annuity is an insurance contract designed to generate supplementary income for retirement. It’s an investment vehicle that allows you to make one-time or recurring deposits, which grow tax-deferred until you’re ready to withdraw the funds. The payouts can either be in the form of a lump sum or a reliable stream of income.

Investing in a deferred annuity offers you several benefits:

  • It provides a structured income stream that can help supplement retirement needs. Additionally, because deferred annuities accumulate over time, they could present a steady and reliable source of income, which may ensure you don’t run out of money during your golden years.
  • It is a low-risk investment tool as it provides guaranteed growth, meaning your savings remain protected when the stock market takes a dip or interest rates lapse. This helps you enjoy financial security and stability, especially when the market faces economic turmoil.
  • It provides tax-deferred growth, meaning you pay taxes on the deposit at a later date when you withdraw the money. This tax advantage allows the funds in the annuity to accumulate more money over time and can translate into significant savings.

An annuity’s ability to provide guaranteed returns and tax-deferred growth makes it an excellent investment tool to help you achieve long-term financial security.

Rental Income 

Did you know you can earn passive income during retirement by renting out extra space in your home? According to the IRS, rental income can be deducted from rental expenses, which is great news for anyone looking to maximize their earning potential. Whether you own or use a property, such as a vacation home or investment property, you can earn money through renting.

In fact, you may be able to rent out a portion of your primary residence to tenants for extra income. So, if you’re looking for a way to supplement your retirement savings, consider exploring rental income options. It may be a smart financial move that pays off in the long run.

Certificate of Deposit (CD)

Consider a certificate of deposit, or CD, to help save for retirement. A CD is a savings product that earns interest on a lump sum for a fixed period, usually ranging from six months up to five years.

A CD differs from a regular savings account because it requires a fixed amount of money for a set time. This means that during the term of the CD, you won’t be able to access your funds without paying penalties. However, the benefit of a CD is that it offers a fixed interest rate, which means you lock in a specific rate of return for the entire term of the CD.

While CDs can be a safe way to save for retirement, they may not be especially lucrative. CD interest rates tend to be lower than other investment products such as stocks and mutual funds. However, they’re insured by the FDIC up to a certain amount, so you can be confident in your investment. 

Reverse Mortgage   

A reverse mortgage loan is available to homeowners aged 62 and older, allowing you to convert a portion of your home equity into cash. Unlike traditional mortgages, to which you make monthly payments, with a reverse mortgage the lender pays you in the form of a lump sum, monthly payments, a line of credit, or a combination of the three.

One of the most significant benefits of a reverse mortgage is that it can quickly provide extra income when you need it most. For instance, if the stock market experiences a significant downturn, a reverse mortgage could provide the necessary financial cushion to help bridge the gap until the market stabilizes. So, if you’re considering this option, it’s essential to gain a thorough understanding of how they work and the benefits and drawbacks before making any decisions.

With various options available, research to determine which type of reverse mortgage is best for your situation. With some forethought and planning, you can determine how a reverse mortgage works best for your retirement goals.

Reverse mortgage borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees.  

This information is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement. 

7 Ways To Recession-proof Your Retirement Savings

If you’re concerned about the financial aspect of retirement, you’re not alone. A March 2023 survey into Americans’ financial concerns by Quinnipiac University found that 68% of people are concerned they don’t have the funds to live comfortably after stopping work. Of all the financial worries in the survey, retirement costs were second only to food prices. 

Recessions and periods of high inflation have a disproportionate impact on retirees. Most retirement accounts are invested in the stock market. Stock and fund prices fall during economic downturns, so the account loses value when you need it the most. 

Luckily, you can take steps to prepare for the worst-case scenarios so that your savings remain intact regardless of the country’s overall economic outlook.

Diversify Your Assets 

Diversification is an essential step for all well-balanced portfolios. It’s especially vital for retirement accounts because of the impact a loss of asset value can have on your quality of life. The Financial Industry Regulatory Authority (FINRA) explains that diversification involves putting your investment capital in uncorrelated assets and different asset classes. 

Uncorrelated assets don’t react to economic events in the same way. Some stocks, exchange-traded or mutual funds, bonds, or commodities may rise in value in an economic downturn or inflation. For example, precious metals and government-backed inflation-protected bonds (IPBs) are considered safe havens during uncertain economic times. Their value often increases or remains stable during market downturns. 

Diversification does take capital away from high-performance assets, but it brings more stability. Because uncorrelated assets increase in value during periods of inflation or bear markets, they cancel out losses from securities negatively impacted by a recession. 

Look For Ways To Reduce Expenses 

You can take steps to ensure your retirement income goes further by reducing unnecessary spending. Unnecessary expenses are costs for products or services you rarely use or that have cheaper alternatives with the same value. 

For example, many people have memberships with streaming websites, magazines, or music apps that they rarely use. If you’re in this category, you can cancel these recurring subscriptions if you don’t use them often or select one at a time to lower your entertainment costs. 

Cellular and internet bills are another target for spending reduction. High-speed internet and mobile data can be expensive. If you don’t use the data or don’t need fast internet speed, you’re overpaying for the service. By tracking mobile data usage on your phone, you can see how much you actually need and adjust your plan accordingly. You could also look at how fast your internet connection should be. 

Convert to a Roth Account 

A Roth IRA is a retirement account without upfront tax benefits. The money you deposit in a traditional IRA is tax-deductible, but you pay regular income tax on withdrawals when you retire. Roth IRA contributions aren’t tax-deductible, but you don’t pay income tax on the principle or any investment profits in the account upon withdrawal. In other words, investment returns from a Roth account are tax-free.

A Roth IRA won’t offer any added protection against inflation on its own. You’ll need to properly diversify and balance your portfolio just like any other type of retirement account. However, it will potentially give you more income in retirement because the withdrawals are not subject to income tax. 

You can convert a traditional IRA into a Roth. You’ll have to pay taxes on the converted amount, but any additional investment earnings after the conversion will be tax-free. Despite the short-term tax burden, you won’t lose a portion of your withdrawals to income tax in the long run.  

Hold Off on Taking Social Security 

You can receive Social Security when you reach 62 if you or a current or former spouse have paid Social Security tax for at least 10 years. However, you’re not required to take these payments until you reach age 70. One retirement strategy is to rely on your retirement savings upfront and defer Social Security benefits as long as possible. 

According to the Journal of Accountancy, you can increase your Social Security payments by up to 8% for each year you delay. In other words, by waiting a decade to take your payments, you earn 8% on the amount due. 

When planning your Social Security benefits, you should only deal directly with the Social Security Administration. Many scams related to Social Security involve tricking retirees into providing sensitive information that could give criminals access to retirement funds. 

Invest in a Deferred Annuity 

Technically, a deferred annuity is an insurance product. You pay a lump sum or make regular deposits. After at least a year, you receive regularly scheduled payments that include the principle and a modest return. 

An annuity can supplement income from Social Security or retirement accounts. Since you can arrange an annuity to provide predictable payments and specific times, it can also help with financial planning. 

Look For Other Income Streams 

While you may be finished with your primary career, it’s possible to seek other types of income. 

For example, you might consider renting out unused space in your home to a regular tenant or on a vacation rental site like Airbnb. While this option requires managing bookings and providing help to renters when necessary, it also allows you to earn from an asset that you already own without having to take a salaried or hourly wage job. 

You could also consider a part-time position to supplement your income. You could choose a consulting position related to your previous career or something you always wanted to do but were unable to try because of your primary career. 

Part-time jobs provide supplementary income that helps you stretch your retirement account withdrawal further. A post-retirement job can supplement Social Security benefits. You’ll have to pay Social Security taxes on your income, but you’ll still get benefits. However, if you earn more than the minimum amount ($21,240, as of 2023), the SSA will deduct $1 from your benefits for every $3 earned. 

Consider a Reverse Mortgage 

One final option is to consider a reverse mortgage. This type of mortgage allows homeowners to secure a loan using their property as collateral. Unlike a traditional mortgage, the homeowner receives payments rather than paying them. The homeowner retains the deed and lives in the home, and they still pay property taxes and insurance. 

The lender recoups their investment by selling the property after the homeowner stops living there or receiving repayment when the homeowner sells it. 

Reverse mortgages have specific qualifications:

  • This HUD program is limited to homeowners age 62 or older. Your home must be your primary residence and be kept in good repair.
  • The amount of money available to you is based on the value of your home and your age.
  • Although your mortgage and other debts are paid off, you still are required to pay your real estate taxes, homeowner’s insurance, and other conventional payments like utilities for as long as you own your home.
  • You must receive consumer information from a HUD-approved counseling source prior to participating in this loan program.

Like other mortgages, you need to complete specific legal steps. These include an application, approval, appraisal, underwriting, and closing. All reverse mortgages require a counseling session during which a third-party advisor helps you decide if this is the correct option for your retirement plans. 

You should look at the different reverse mortgage options and learn more about the process before applying. 

With careful planning and additional income from a reverse mortgage, part-time job, or investments, you can fully enjoy retirement regardless of the current economic environment. 

If you want to learn more, download this free guide or find a loan officer near you.

Reverse mortgage borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees.  

This information is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement. 

How To Protect Yourself From Social Security Scams

Social Security fraud — where scam artists often pose as Social Security Administration (SSA) representatives — represents a growing threat. Scammers often ask older adults to confirm their SSA account details, before finding ways to access and steal hard-earned money.

Financial volatility can affect older adults in particularly negative ways. Inflation can reduce savings, further stressing your budget as you prepare to retire. The last thing you need is financial difficulty from a Social Security scammer.

What Are the Common Types of Social Security Scams?

Social Security scammers are devious. They will use several different methods to separate older adults from their money. Sometimes, they will directly impersonate a Social Security official. In other cases, scammers might attempt to steal from older adults without ever speaking directly with them. Phishing emails, text messages, and even paper mail are sometimes effective to trick unsuspecting older adults.

Fraudulent Phone Calls

Many scam phone calls don’t sound fraudulent at all. Sophisticated Social Security scammers can make calls sound sincere, even urgent. They will pretend to be Social Security representatives, often calling to alert you of a pretend issue with your account.

On the phone, Social Security scammers will say things that real Social Security employees never would. They might threaten to end your Social Security benefits unless you take immediate action. They might also request payment through gift cards or PayPal. If you ever suspect that a call might be fraudulent, hang up. Dial the Social Security Administration directly to verify the call.

Phishing Emails

Some Social Security scammers will use less direct methods to attempt scams. One popular method, phishing emails, are fake emails that often appear legitimate. Fraudulent actors create email addresses and official wording to make the email look like it was sent by the SSA.

Most phishing emails contain an attractive link. This link often sends you to a website, where you’re encouraged to submit personal information. Depending on the email, you might be asked to submit bank details, passwords, or Social Security numbers.

Paper Mail

Paper mail Social Security scams are particularly dangerous for seniors. Scammers will often mail fake documents, meant to look like real government letters, to older adults’ homes. Letters might make demands for money or personal information.

Paper mail Social Security scams are similar in many ways to other forms of SSA fraud. They are typically unsolicited and request payment through wire transfer or specific gift cards. Many letters are poorly made, and contain spelling or grammatical mistakes throughout.

How To Protect Yourself From Social Security Fraud

No matter your age, Social Security scams are still a threat. It’s important to be aware of popular Social Security tricks and how to defend yourself. Staying up-to-date on the latest forms of fraud can help minimize the chances of scammer success.

Here are a few ways to protect yourself against Social Security fraud:

  • Ignore unsolicited messages: Do not answer or maintain calls from people claiming to represent a government agency or the Social Security Administration.
  • Verify caller identities: Before continuing any conversation, make sure that the person you are speaking with is a verified representative of an agency. If you suspect fraud, you can hang up and call the agency directly to verify the caller.
  • Keep personal information private: Do not share any private information through a phone call, email, text message, or paper mail. This information includes usernames, passwords, security questions, bank information, and Social Security details.
  • Avoid unorthodox payment methods: Never transfer funds to a caller or email sender through a suspect payment method. Avoid purchasing gift cards, wiring checks, or sending money through social media if you have not verified their identity.
  • Pursue frequent, ongoing education: Learn more about recent Social Security scams and teach your family members how to recognize them.

Given the frequency of online Social Security scams, it’s also important to update your computer. Install a firewall and antivirus software on any device — phone, tablet, or desktop — that can access your Social Security account.

How To Report Social Security Scammers

When you suspect a Social Security scam, don’t wait. Reporting Social Security fraud helps protect yourself and others from similar losses.

Contact the Office of the Inspector General with details of the Social Security scam. Include details like the caller’s name, phone number or email address, their script, and any other useful information. File a report with the Federal Trade Commission if someone has used your Social Security details without your permission.

Other Scams That Target Retirees

Retirement is typically a period of financial security, where people reduce their workload and enjoy life. This makes retirees ideal targets for scammers who want to steal large amounts of money.

Scams targeting retirement-age individuals are on the rise. They can take many forms — including health insurance fraud and reverse mortgage fraud — and can create serious financial loss.

Medicare/Health Insurance Fraud

Scammers sometimes pose as Medicare employees to cheat retirees out of their savings. They will call an older adult without warning, often claiming that there is a problem with their health insurance coverage. To fix that problem, they say they need to confirm a few pieces of personal information.

If the older adult provides that personal information, a scammer can use it to access their finances and withdraw funds.

In other cases, scammers will call retirees pretending to sell discounted Medicare services. People who volunteer their bank information over the phone or email can quickly become victims of identity theft.

Internet Scams

There’s no shortage of internet scams that target retirees. Some use viruses that steal information from computers or smartphones. These viruses can enter a computer through a variety of methods, from email attachments to physical flash drives.

Others use fake pop-up messages that trick retirees into believing that their device has a problem. The pop-ups typically contain a virus, released after someone clicks the message. If the pop-up itself doesn’t contain a virus, it can still lock the device and prompt a call to a specific phone number. On the other end of that phone number is a fraudulent actor who tricks the caller into providing personal information.

Investment Scams

Older adults with access to retirement savings often want to invest — and scammers know it. They will operate a variety of investment schemes, meant to sound legitimate until retirees lose their money.

Ponzi schemes are perhaps the most common form of investment scam. Scammers ask retirees for an investment, promising high returns in a short time span. Any invested money goes to earlier “investors” to create the appearance of a successful company. Investors lose money when the scheme fails.

Many scammers also pretend to be certified investors. They will call and offer to invest a retiree’s money in promising stocks. However, they first ask for a deposit. Once the deposit is paid, the criminals vanish with the money.

Reverse Mortgage Scams

Reverse mortgage schemes are also a growing threat, particularly for older adults looking to access home equity. Dishonest mortgage brokers will commonly offer a reverse mortgage opportunity to older adults for an extremely limited time. Unlike an ethical reverse mortgage — with which buyers can supplement income through home equity — reverse mortgage scams force seniors into a hasty decision. Once the deal is done, they are locked into high-interest payments.

Education is the best defense against reverse mortgage schemes. Retirees should study reverse mortgages so they know what to expect from their interest rate, legal agreements, and total equity. Older adults should also consider all available reverse mortgage options before deciding on a provider.

Reverse mortgage borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees.  

This information is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement. 

When Is the Right Time to ‘Right-Size’ Your Home?

Countless Americans are tightening their wallets due to increased monthly costs. Some people feel the strain of housing costs (including home insurance premiums and utility bills) while others have noticed their grocery and gas bills are going up. Inflation affects everyone but some people are impacted more than others. 

If you are eyeing retirement, you might be worried about how current economic trends could impact you after you leave the workforce. You aren’t alone. More Americans are considering adjusting their home sizes to meet their current needs. While this is often called “downsizing,” the reality is that these families are “right-sizing,” or moving into a house that accommodates their future plans. 

Is right-sizing for you? There are multiple benefits of moving throughout life. Learn more about this concept and how it can help you retire comfortably. 

What Are The Benefits of Right-Sizing?  

Regardless of your age, there are several benefits of right-sizing. Your needs and your finances change throughout your life and it only makes sense that you would adjust your housing to match these trends. Here are a few perks of right-sizing. 

Easier Upkeep  

Moving to a smaller property can help you save time, money, and energy on general upkeep. You will spend less time dusting, mopping, and cleaning because there are fewer rooms that need your attention. You can also spend less time landscaping if you move to a smaller plot. 

Right-sizing can benefit both older and younger homeowners. A younger homeowner might not have the skills or savings to make necessary repairs. Older homeowners might not have the ability or desire to tackle home projects (like climbing onto the roof to clean your gutters). Now might be a good time to look into a bungalow, townhome, or condo that is easier to maintain.  

Reduced Expenses 

Moving to a house that matches your budget can immediately lower your monthly costs. You will notice lower property taxes, lower monthly insurance rates, and lower utility bills. If you currently live in a neighborhood with a homeowner’s association (HOA), you can find a house with cheaper monthly fees — or no HOA fees at all. 

Some people save hundreds of dollars each month just by right-sizing their homes. This allows older homeowners to enjoy a low-stress retirement while helping younger homeowners grow their savings to prepare for life milestones like marriage, travel, children, and their own future retirement. 

More Flexibility 

Right-sizing can also give you the freedom to choose where you live. Consider moving to a coastal town where you can retire in peace. Find a cabin in the woods where you can commune with nature. It is easier to find properties within your budget when you don’t need a large home in your desired area. 

Cons of Right-Sizing 

While there are several benefits of right-sizing your home, there are a few drawbacks to consider. It’s up to you and your family to review your options and decide whether the pros outweigh the cons. 

  • You will have a smaller living space. Make sure you have enough room for your family to live comfortably. 
  • You might lose your largest real estate asset. There is always a risk that your home’s value could increase after you sell it, causing you to miss out on potential profits.
  • Your family will have to deal with the stress of moving. Packing and selling a house is exhausting and expensive – even if you are just moving down the street.     
  • This could mean giving up a family home. If you raised your kids in that house, selling means leaving a key part of your life behind. However, you will always have the memories with you. 

You don’t need to decide whether right-sizing is the best choice for your family immediately. Instead, give everyone involved in the decision time to process what a move means and how it can benefit the family. Within a few months, you can decide.  

When To Consider Right-Sizing 

Regardless of whether you are moving down the road or across the country, there are a few factors you need to consider when right-sizing. People of all ages can evaluate their current situations when making their future house plans. Use the following criteria to objectively determine whether right-sizing is the best choice for you or whether you can afford to stay in your current home.

You Spend Too Much on Housing 

First, look at your finances and calculate what percentage of your monthly income goes to housing (your mortgage or rent payment). The Department of Housing and Urban Development recommends spending no more than 30% of your monthly income on housing costs. If you spend more than 50% of your income on housing, it is considered a severe burden.

Right-sizing could bring your monthly costs below the 30% mark, freeing up your budget for additional savings or giving you spending money for hobbies, travel, and other treats.   

You’re Eating Into Your Savings 

Another indicator that you are living in a house above your means is if you are using your savings to cover basic costs. Most financial experts recommend keeping at least three to six months’ worth of expenses in your emergency fund. Do you find yourself pulling from your savings to cover your electricity bill? Are you spending more than you make each month?

This affects both new homeowners and people who are preparing for retirement. Living in a city like Seattle might seem glamorous, but make sure you can afford it.

Maintenance Is Becoming too Difficult  

If you feel overwhelmed with your home maintenance task list, it might be time to right-size. This affects homeowners from all walks of life. If you are building your career, you might not have the time and energy to take on weekend projects. If you are getting older, you might not feel safe shoveling the driveway or climbing on the roof. 

Even growing families might decide to right-size. A new baby can take away your time and budget to work on home projects. 

Your Home No Longer Suits Your Needs  

Finally, your home might have been perfect for you when you bought it, but what about now? Do you still need extra bedrooms if your kids no longer live with you or a home office if you no longer work? You might benefit from moving to a house that has fewer bedrooms and less square footage to match your current lifestyle. 

Also, evaluate whether you want a house that is easier to navigate. A home without stairs and without a steep driveway might be safer in the long run.

Alternatives to Right-Sizing  

Many people have strong connections to their homes and love where they live. If you know you need to right-size from a financial perspective but don’t want to move, consider other options. Here are a few ways to lower your expenses while staying in your home.

Take Out a Home Equity Line of Credit   

A home equity line of credit (HELOC) gives you cash based on the value of your home. It is a second mortgage that is often used to cover major expenses (like a significant home repair). You might qualify for a HELOC if you own your home outright or if you own a significant portion of your home. Talk to a financial advisor to learn more. 

Renting Out Space in Your Home 

If you have extra rooms because your kids moved out, consider looking for people to rent the space. You can either list the room on a booking site like Airbnb or look for long-term renters who sign a lease. 

While renters can provide a source of secondary income to cover your housing expenses, you also have to live with them. You might not like sharing communal areas with others or like your tenant. Plus, there’s always a risk that a tenant stops paying and you have to evict them. 

Refinancing  

Another option for lowering your expenses is refinancing your mortgage. If you take this route, the lender will look at the current value of the house and what you owe on it. They might be able to offer a lower interest rate and lower monthly payment on the property through refinancing. 

There may be some drawbacks to choosing this option. Refinancing could change your home insurance costs, which could actually increase your monthly expenses in some areas. 

Reverse Mortgage

With a traditional mortgage, you make payments to the lender. With a reverse mortgage, the lender makes payments to you. These payments could be a lump sum, a line of credit, or standard monthly deposits.

The main criteria to qualify for a reverse mortgage is age: you need to be 62 years or older. There are other requirements related to residency and equity for your home. However, this option is growing in popularity for Americans who are able to use it. Older homeowners don’t have to worry about moving and can receive regular payments no matter how volatile the market gets. This stability is highly valued by many retirees. 

This is just one way to adjust your mortgage to prepare for retirement.

Learn more about mortgage options to choose the best one for your needs, or find a reverse mortgage loan officer near you!

Reverse mortgage borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees.  

This information is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement. 

States That Do Not Tax Retirement Income 

Saving for retirement is a prominent concern for many Americans for a multitude of reasons, including high inflation rates, which can impact monthly budgets and the overall cost of utilities. In your golden years, retirees shouldn’t have to worry about taxes impacting the retirement income they worked their entire lives to earn. 

Fortunately, there are several states that don’t treat retirement income, including pension payouts, 401k distributions, and IRA payments, as taxable income. Here’s what you need to know. 

Which States Don’t Tax Retirement Income? 

It is important to note that the seven states below do not tax retirement income because they don’t have any state income tax. In 2023, nine of the United States don’t tax retirement income:

  • Alaska
  • Florida
  • Nevada
  • South Dakota
  • Texas
  • Washington
  • Wyoming

Instead, these states generate revenue from several other sources. For example, Alaska, South Dakota, and Wyoming rely on the sale of natural resources to keep taxes low for residents. Similarly, because Alaska is rich in oil, the state doesn’t tax residents on their income, estates, or retirement benefits.

Which States Don’t Tax Pensions? 

Seven states do not tax pension payments made to retirees: 

  • Alabama
  • Alaska
  • Florida
  • Hawaii
  • Illinois
  • Iowa
  • Mississippi
  • Nevada
  • New Hampshire
  • Pennsylvania
  • South Dakota
  • Tennessee
  • Texas
  • Washington
  • Wyoming

Similarly, Illinois, Pennsylvania, and Mississippi don’t tax IRA or 401k plans. 

Which States Don’t Tax Social Security? 

Fortunately, most states in the U.S. don’t tax Social Security. The following 38 states do not tax Social Security in retirement:

  • Alabama
  • Alaska
  • Arizona
  • Arkansas
  • California
  • Delaware
  • Florida
  • Georgia
  • Hawaii
  • Idaho
  • Illinois
  • Indiana
  • Iowa
  • Kentucky
  • Louisiana
  • Maine
  • Maryland
  • Massachusetts
  • Michigan
  • Mississippi
  • Nevada
  • New Hampshire
  • New Jersey
  • New York
  • North Carolina
  • North Dakota
  • Ohio
  • Oklahoma
  • Oregon
  • Pennsylvania
  • South Carolina
  • South Dakota
  • Tennessee
  • Texas
  • Virginia
  • Washington
  • Wisconsin
  • Wyoming

Other Ways to Avoid High Taxes in Retirement 

Aside from moving, there are plenty of other convenient ways to avoid paying excessive taxes in requirements that don’t require you to uproot your life. 

Contribute to a Retirement Account

Making regular contributions to accounts like 401(k)s, traditional IRAs, and Roth IRAs can help you save on taxes. Contributions to these accounts are typically tax deductible, meaning the money removed from your paycheck is subtracted from your taxable income. 

Keeping your money in these types of retirement accounts means you pay taxes upfront instead of when you make a withdrawal in retirement. If you’re living in a state where you’re in a high tax bracket, keeping money in retirement accounts like Roth IRAs can be beneficial in the long run. These tax-deferred accounts can help your money grow faster over long periods of time.

Convert to a Roth Account 

If you already have a traditional IRA or 401k, there are still ways you can save on taxes in retirement. In some cases, you can avoid taxes altogether on these funds by converting them to a Roth IRA account. Here’s how a Roth conversion works:

  1. Pay taxes on the converted amount. When you convert your traditional IRA or 401(k), you will owe income taxes on the amount converted because traditional retirement accounts are funded with pre-tax dollars. Meanwhile, Roth accounts are funded with after-tax dollars.  

Enjoy tax-free withdrawals in retirement. After the conversion is complete, your funds will grow tax-free within the Roth account. This means you won’t owe taxes on withdrawals in retirement, including any investment gains you might acquire. 

Reverse Mortgage 

Another way to avoid paying high taxes in retirement is to participate in a reverse mortgage. There are a few options when it comes to reverse mortgages, but one of the most common is the Home Equity Conversion Mortgage (HECM). This reverse mortgage option is insured by the Federal Housing Administration (FHA).

The HECM reverse mortgage is a loan just like a traditional mortgage. However, instead of making monthly payments to a lender, seniors receive payments from their lender. This is available in the form of a lump sum, line of credit, monthly payments, or a combination of the three. These funds can be used to help homeowners in a variety of situations, including retirement.

Usually, reverse mortgages benefit retirees who are looking for enough funds to retire in a particular place. They can also provide seniors with financial freedom. Funds can be allocated to pay off credit card debts or make home renovations so they can stay in one place for longer without having to tap into their liquid funds. 

How much retirees receive in their reverse mortgage is based on factors like the age of the borrower, the value of the property being mortgaged, and current interest rates. The amount a borrower receives typically ranges between 40-60% of the home’s total value. It’s important to note that the FHA puts a lending limit on how much lenders can loan to reverse mortgage borrowers. In 2024, that limit is $1,149,825. This amount can increase over time if the loan has a variable interest rate, which also provides more options when it comes to the ways you receive the money from your reverse mortgage. 

Fixed-rate borrowers are limited to only receiving their reverse mortgage payments in a single lump sum payment. But if you opt for a reverse mortgage with a variable interest rate, payments can look like:

  • Monthly payments to residents of the home
  • Monthly payments for a fixed number of months 
  • A line of credit  
  • A line of credit and monthly payments 
  • A lump sum disbursement and monthly payments 
  • A lump sum disbursement along with a line of credit 

Unlike other kinds of mortgages, the payments made on reverse mortgages are not taxable. Plus, when reverse mortgages are used early enough in retirement, they can provide income to seniors looking to convert their savings into a Roth account at a lower tax rate. 

If you’re interested in applying for a reverse mortgage, here are the necessary steps: 

  1. Meet with an advisor who will review your finances and let you know if a reverse mortgage is right for you.
  2. Meet with a HUD-approved counselor who will review the pros and cons of a reverse mortgage. 
  3. Submit your application, which will be processed by underwriting. 
  4. Obtain an appraisal to determine the current market value of your home.
  5. Schedule a closing date and sign the documents required. 
  6. Receive your reverse mortgage funds in the manner you agreed to in your application. 

When it comes to finding the reverse mortgage lender that’s right for you, research is of paramount importance. Doing so will give you the knowledge you need to understand all of the options a lender has to offer. 

Common Sources of Retirement Income 

When it comes to retirement income, there are several common sources. Each is taxed differently depending on the state you reside in. 

Social Security  

Social Security is a federal government program that provides retirement benefits to eligible individuals that are funded through payroll taxes workers and employers pay into the system during their working years.

Retirement Accounts 

The funds contributed to retirement accounts like Roth IRAs allow the retiree to make money through various stocks, bonds, mutual funds, and other investments that can grow over time and serve as tax-free money when retirement rolls around. 

Annuities and CDs 

Annuities and CDs (Certificates of Deposit) are two other financial products that can provide a source of income in retirement. An annuity is when an individual makes payments to an insurance company that guarantees a stream of income over a period of time. They’re offered with fixed or variable interest rates, some even offering the option of inflation-adjusted payments to help protect against inflation. 

Meanwhile, CDs are savings accounts that offer a fixed interest rate for a fixed term. Individuals who invest in CDs agree to keep their money in the account for a set period of time, earning them a guaranteed fixed interest rate on their investment. 

Pensions 

Many employers offer pensions as part of a retirement plan. Pensions provide a guaranteed source of income by setting aside funds from your paychecks over the years that you work. Unlike other retirement accounts, such as 401(k)s and IRAs, the amount of income received from a pension is not dependent on investment returns or market performance.  

Property 

If you are looking to downsize in retirement, selling your property can be a source of income. Similarly, property can provide access to a reverse mortgage in retirement. 

Reverse mortgage borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees.  

This information is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement.