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Retirement Planning for the Middle Class: 3 Essential Strategies

Save more for your retirement! No doubt you've heard this common advice more than once. But that's not even among the top three retirement planning strategies for middle class Americans who are currently approaching their retirement years, at least according to a recent report prepared for the Society of Actuaries.
The report analyzed the retirement challenges faced by households in or near retirement (ages 50 to 75) and with a net worth of $111,000 to $1,300,000 (if you're statistically inclined, that represents the 25th to 75th percentiles of this group by net worth). According to the report, this middle class group will need to rely primarily on Social Security benefits, continued employment, and pensions to fund their retirement, since their retirement savings aren't sufficient to generate adequate amounts of retirement income. And since most boomers don't have significant pensions, that just leaves Social Security and continued employment as their primary sources of retirement income.

Here's the reason why saving more isn't listed as one of the top three strategies for this group of older people in the middle class: Most of them have more net worth in their home equity than in their 401ks, IRAs, and other retirement savings. For example, the people in this group who are ages 55 to 64 have median financial assets (401ks, IRAs, etc.) equal to $108,000. The corresponding median nonfinancial assets (primarily home equity) for this group equals $240,000. When this group eventually retires, it's likely that nonfinancial assets will still be greater than financial assets, no matter how much they save between now and retirement. So the decisions they make regarding their home equity will have a greater impact on their retirement security than decisions regarding their retirement savings.

Taking this information into account, here are the three retirement planning strategies that I think are essential for the middle class:

1. Work as long as you can.

2. Maximize Social Security by delaying benefits as long as possible (but no later than age 70).

3. Utilize home equity to generate additional retirement income.

I've previously written about the first two strategies, so let's focus on the third strategy -- using home equity to generate retirement income. This isn't as easy or straightforward as it sounds. Let's look at three ways to do this:

1. Sell your house, thus converting your home equity into liquid assets, and use these assets to generate retirement income. Of course, you'll have to consider how this will change your housing expenses. If you sell and move into a less expensive house, then you've freed some cash for investing purposes. On the other hand, if you sell and decide to rent instead of buying again, then you'll need to factor in your rental costs.

2. Rent a room or two for additional income. This could work if you have a large, "empty nest" house in the suburbs and don't want to move, and if you don't mind other people living in your house.

3. Take out a reverse mortgage, which can provide a monthly income and doesn't require you to sell your house or move. Discussing the pros and cons of reverse mortgages in detail is beyond the scope of this post, but let me say two things about them here. First, the reverse mortgage market is relatively young, and I'd rather wait to see if added competition will result in more favorable costs and interest rates. And second, because of the high costs of reverse mortgages, I'd use them as a last resort -- when you're no longer able to work and desperately need the income. I'd rather you use your home equity as a reserve in case you need expensive long-term care and you haven't bought long-term care insurance .

Given the situation described above, middle class Americans will need to be creative with their retirement planning and lifestyle choices, particularly with respect to housing, which is the highest expense in most retirees' budget. Here's just one "outside the box" idea: Two couples that each own homes could move in together and rent the other home for income.

One last thought: Even if saving more isn't one of the top three retirement planning strategies, it's probably in fourth place. So you'll still be better off saving as much as you can, and making smart investment choices. Don't use this post as a reason to give up and stop saving!

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