Originally published in the News Star and the Shreveport Times on Sunday, December 18, 2016.
Q: I am single with no children or dependents. Just me and my dog. I will probably work five more years. I have no one in particular I am trying to leave money to, so how do I make the most of my money? One thing I want to make sure of is that I don’t run out of money before I die because there is no one else to take care of me.
A: The fact that you are single both simplifies and complicates your choices.
It obviously simplifies them because you have no one else but yourself for whom you need to provide. By definition, that ought to leave more for you.
But it also complicates your choices in that you have no “human capital” to access beyond yourself. Whereas a married person (or someone with children) might have others to care for them during periods of lengthy illness, you don’t. So you’re more likely to need to pay for a level of care others might get “for free.”
Here are some areas a single person might focus on:
Save aggressively. You may not actually need any less money than the married person. Your money may simply need to be spent in different ways. Whether single or married, if you save aggressively you both stockpile needed resources for later, as well as learn to live on less.
Protect yourself. Don’t skimp on things like disability income insurance or long-term care insurance. For the single person these are every bit as important as they are to someone with a family, if not more so.
Invest conservatively. You say you only have about five years before you retire. If so, you can’t stand a significant market downturn, such as we haven’t seen for quite some time. Stock markets regularly drop 20% to 50% every few years. What would happen to your retirement prospects if your portfolio went down 50% next year? That is absolutely not a prediction, but it is always a possibility.
Guarantee your income. You probably have a basic lifestyle and an ideal lifestyle. Your basic lifestyle involves getting all the bills paid on time, buying groceries and keeping the lights on. Your ideal lifestyle includes more “fun stuff,” which you admittedly could do without, but you don’t want to.
Generally, as we age, our tolerance for ambiguity and uncertainly reduces dramatically. Knowing that your basic lifestyle is funded by guaranteed income will go a long way towards increasing your sense of wellbeing and security in retirement. Social Security will provide the foundation for guaranteed income.
On top of that, look into guaranteed income annuities (something like a do-it-yourself pension plan, sold by insurance companies) to make up the difference. Guaranteed income annuities do exactly what their name implies – in return for a lump sum of money up front, they guarantee a specific amount of income (for example, $1000 per month) for your entire lifetime. No matter how long you live.
By use of “actuarial diversification,” an insurance company spreads the “longevity risk” over a large group of people, thus removing the risk for everyone in the group. Nifty idea.
Give your free capital the opportunity to grow. If your basic income needs are covered, the rest of the money you’ve saved for retirement might be viewed as “free” capital, or capital not immediately employed doing another job. You don’t have to spend this money now, so it can be employed in longer-term opportunities to grow.
This kind of longer-term investing comes with its fair share of volatility, but if you’ve got your immediate income needs met, you can rest well knowing these are the funds that will grow for tomorrow.
Remember the money in your house. If you own your own home, and it’s paid for by retirement, you’ve got another source of income if you need it. Not by selling your house, but by use of a reverse mortgage. As a single person you’re not trying to pass on your house to children, so why not use it to both live in and provide income? This option won’t be for everyone, but it may provide needed income for someone coming up short.
Being single definitely changes some of the financial strategies you’ll employ.
But just like those with families, it all starts with careful planning.
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