Debt and Your Retirement

Most people’s vision of  retirement not only involves freedom from work but also freedom from debt. A debt-free retirement is a laudable goal, but it’s one that has become increasingly difficult for many to achieve. Mortgage, credit card debt, even student loans now follow people into their golden years, and that can have serious consequences for their long-term financial health.

When you retire, you stop actively earning income and start living on your savings. If you’re still paying off debt, those payments will be another fixed expense. By going into retirement debt free, you’ll lower your living expenses,  which will make that nest egg last longer.

Reducing Debt before Retirement

If at all possible, you’ll want to eliminate your debt before you retire. Of course, some types of debt are worse than others. High-interest credit card debt can be a significant burden, so you’ll want to eliminate it as quickly as possible. Look for areas in your budget where you can cut back and make extra debt payments, or consider a second job to make extra payments.

If you have a car loan and are close to retirement, consider selling the car after you quit working, since many people find they no longer need multiple vehicles in retirement.

Becoming debt-free before retirement may mean aligning your mortgage payoff date with your retirement date; you may be able to bring your mortgage payoff date closer by making extra payments. Often, retirees want the peace of mind that comes with knowing they’ll own their home when they retire. But that accelerated payoff plan might not be right for everyone. If you have a relatively low interest mortgage, no other debt, and are already maxing out your retirement savings, you may feel comfortable sticking with your standard repayment plan, especially if you can get more from investing the money that you’d otherwise use to make the extra mortgage payments.

One thing you shouldn’t do: take money out of your retirement accounts to pay off credit card or mortgage debt. If you focus all your financial resources on paying off your loans, you run the risk of retiring with inadequate savings. Another potential misstep:  prioritizing debt payoff over saving. While you don’t want to be saddled with excessive debt, you also don’t want to end up cash poor in retirement, without enough money to
meet everyday expenses.

Debt in Retirement

Unfortunately, many people still end up nearing retirement holding a significant amount of debt. If that’s your situation, you have several options. One is to delay retirement for a few years while you concentrate on paying off debt. Plus, if you continue to work, you’re not tapping your nest egg, and it can continue to grow. In
addition, if you delay claiming Social Security, your monthly payment will increase by up to 8% a year until you reach age 70.

If you must enter retirement with debt, you may need to pare down your lifestyle — traveling less frequently, moving to a smaller home, or giving up your boat or RV — to reduce debt and minimize the risk of outliving your retirement savings. You could also continue to work part-time or as a consultant. That can bring in extra income, and many people enjoy a more gradual transition to full retirement.

Finally, know that going into retirement with debt poses some other, specific risks. While most creditors can’t garnish your Social Security payments, the federal government is an exception. If you owe back taxes, student loans, alimony, child support, or
certain other types of payments, you may lose up to 15% of your Social Security benefit.

Frankly Speaking

“Political power does not rest with those who cast votes; political power rests with those who count votes.” -Joseph Stalin

THE SAME SCORE – Donald Trump beat Hillary Clinton 306 – 232 in the Electoral College in 2016, but then lost to Joe Biden 306 – 232 in the Electoral College in 2020 (Electoral College).

“The saddest aspect of life right now is that science gathers knowledge faster than society gathers wisdom.” -Isaac Asimov

The dust has settled and as we approach the New Year, the ravages of the old one continues to vex us. Granted, markets seem to be reflecting a sense of exuberant well-being, but we all know that life isn’t so copesetic and we are feeling the seeming relentless strain of Rona. So, what can we do? Certainly, continue with your financial plan, perhaps modify it a bit but do NOT abandon it. ‘Follow the  guidelines’ staying socially distant, wear masks and distract yourself with physical activity like walks, (great if you have a dog), exercise, meditation, yoga and ‘mindfulness’ (look it up as I had to).

Realize that this too shall pass like the Tech Wreck; 9-11; the Debt Wreck; MERS; SARs – all of which seemed so terrible… for a while.  remember to say the prayer, “Lord grant me the serenity to accept the things I cannot change, courage to change the things I can, and the wisdom to know the difference”.  We have a vaccine now; all we need is a distribution method.

Interested in learning more about
what you can do to retire debt-free?
Please call to discuss this in more detail