Markets & Finance

Retirement Income: Think Creatively


From intra-family mortgages to nontraditional fixed-income investments, here are a few strategies for generating extra golden-years cash flow

This holiday season's massively hyped Sylvester Stallone movie, Rocky Balboa, finds the aging boxer—and the actor who plays him—beefing up their retirement accounts with one last return to the ring (wife Adrian, alas, isn't around to share the popular pugilist's golden years). Right now, many of the 77 million Americans nearing their golden years may be hoping for a similar yuletide miracle.

That's just Hollywood. Still, retirees and soon-to-be retirees may have some retirement options they haven't considered yet. In some cases, the boomers' grown-up kids might be able to lend a hand (see BusinessWeek.com, 10/16/06, "Getting Your Parents' Finances in Order").

"Anything a child can do to help the parent delay taking Social Security benefits can be helpful," says Bob Nusbaum, president of Pittsburgh-based financial-planning firm Middle America Planning. For example, Nusbaum observes, lending a car now and then might help the parents downsize from two cars to one.

Not ready to take up boxing? This week's Five for the Money looks at some other less obvious, but savvy, ideas for generating retirement cash flow.

1. Be house-smart

Brent Little, managing partner at Plano (Tex.)-based Odyssey Wealth Management, recalls a client who needed the level of income he might generate from corporate bonds. But instead of turning to the bond market, the client paid off his son's home mortgage and now has his son making mortgage payments to him instead of the bank. This way, the father earns 6%—the interest rate on the son's mortgage—compared with the 4% gain the Lehman Aggregate corporate bond index has posted this year.

Though not for everyone, this approach can be a way for baby boomers to get cash flow while still allowing their children to get the interest deduction for tax purposes. "Usually, we see parents helping children buy a house, but this time around the children can help the parents by giving them stable income in their retirement years while not costing the child anything," Little says.

Be warned: Little's strategy does carry risks, particularly if a child has an unstable employment history. Parents would be placing a large amount of their money in a single, illiquid holding, rather than in a broadly diversified investment portfolio. It's best to consider this option on a case-by-case basis.

2. Check up on insurance policies

Of course, retirees and those nearing retirement can also boost their cash flow by trimming their spending. Eliminating or reducing unneeded life-insurance coverage can cut down on the need for cash today, financial planners suggest. In some cases, baby boomers might even be able to turn the cash value of an unnecessary policy into an annuity.

"Many baby boomers still have whole life or some cash-value life insurance," says John Deyeso, principal of New York-based financial-planning firm Financial Filosophy. "Do they still need the life insurance? If so, do they still need the same level of coverage?" It's important to tailor your coverage to your current needs.

3. Look beyond traditional fixed income

The recent rising interest rate environment has led some investors to seek fixed-income investments other than bonds, which tend to underperform in those circumstances. James Holtzman, a financial planner at Pittsburgh-based Legend Financial Advisors, says "nontraditional" fixed-income offerings, such as bank loan funds, can be a smart income-generating alternative. "Nontraditional fixed income still isn't correlated to stocks but has done well when interest rates rise," Holtzman says.

Preferred stocks, essentially a hybrid of stocks and bonds, offer another way to generate extra cash flow (see BusinessWeek.com, 10/18/06, "Hungry for High Yields"). High-yield mutual funds like Loomis Sayles Global Bond (LSGBX) can also make sense, says Georgia Bruggeman, chief investment adviser at Holliston (Mass.)-based financial-planning firm Meridian Financial.

But the yield-hungry should be careful. "Know what you're buying," Bruggeman cautions. "Stretching for yield often leads to higher risk unless you have done your homework."

4. Talk to your children

Mortgage payments aren't the only way the children of retirees or near-retirees can help their parents generate retirement income. Small-business owners may want to consider hiring their parents on a part-time basis as they make the transition into retirement. "If the children have their own business and are in a higher tax bracket than their parents, hiring their parents part-time can be a great way to provide some cash flow," says financial planner David Jacobs of Kailua (Hawaii)-based Pathfinder Financial Services.

If possible, children might want to buy their parents' home and rent it to them at a below-market rate, other financial advisers suggest. "Just be sure you don't go too below market or buy it for too little, or the IRS may think it's a gift," says Susan Fulton, principal at Bethesda (Md.)-based financial-planning firm WealthTrust FBB.

An outright gift, while potentially awkward and possibly not financially feasible, can also help solve retirement-income troubles. One person may give another a gift of up to $12,000 tax-free annually. Sid Blum, a financial planner at Green Light Fee-Only Advisors in Evanston, Ill., recommends giving money to pay parents' long-term insurance premiums, which also allows the parents to continue to take the premiums as a tax deduction.

5. Give your portfolio a tune-up

Well, this one might not seem particularly outside-the-box, but a careful portfolio assessment is crucial for investors in or nearing retirement. Baby boomers should review their income sources and their asset allocation to be sure it still makes sense given their changing needs.

With life expectancies growing, fixed-income investments might not be enough, financial planners say. "Depending on the amount of investable assets and income needs, some part of the portfolio allocated to growth assets, such as dividend-paying stocks, can help sustain the portfolio over time," says Penny Marlin, president of Delray (Fla.)-based Marlin Financial. "Cash flow should be viewed in terms of total return."

Most importantly, soon-to-be-retirees and their children should talk about their income needs and develop a plan for the years ahead. After all, not every 60-something can count on a blockbuster movie franchise for extra cash flow.


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