Debt and Retirement - How to Handle both when Nearing RetirementSubmitted by Crosswind Advisors, LLC on December 3rd, 2015
An increasing number of Americans are facing an uphill battle just trying to save enough and earn enough on their savings to be able to retire on time. Carrying much higher debt burdens than previous generations, many pre-retirees have had to put their savings on the back burner to focus on debt reduction, which, for practical purposes is smart, but it is also the primary reason why some will need to delay retirement or drastically downsize their retirement lifestyle. In retirement, cash is king, and every dollar of debt is a direct drain on your cash flow. But, it’s never too late (nor too early) to take counter measures that will help you get back on track.
Should I try to pay off my mortgage before retirement?
The days of mortgage-burning parties are nearly a thing of the past. As a result of the home refinancing hey days of the last five to ten years, 67% of homeowners in their 50s and 60s are now carrying mortgage debt well past the age of 70. *
Financial planners are divided on whether it’s a good idea to try to pay down your mortgage as soon as possible. There are those who say that it may be a disadvantage to lose the mortgage interest deduction. The reality is, however, that many retirees don’t have enough personal deductions to be able to use their mortgage deduction with most only qualifying for the standard deduction. Also, if you enter retirement with 10 or 20 years paid on your mortgage, the interest portion has declined to the extent that it’s not generating enough of a deduction for many people.
The answer is, yes, you should try to pay down your mortgage by making extra principal payments when you can. The alternative, which is becoming more of preference for an increasing number of retirees, is to simply downsize and sell your home and apply the equity to a more affordable living space.
Do I save for retirement or pay down credit card debt?
Sadly, this is turning into a classic dilemma faced by a majority of Americans. Unquestionably, you should try to pay off all high interest debt before retirement. If your retirement assets are earning less than 6% a year, even 9% credit card debt will cost you vital cash flow. This is the time to get deadly serious about your credit card debt. Every penny you are paying towards debt needs to go towards your financial security, so you can’t begin implementing your debt payoff plan soon enough:
- Get on a budget: Set a monthly target for debt payments (and make it a stretch goal) and then budget everything else around that. Eliminate non-essential expenditures. Find ways to stretch your essential expenditures. Downsize your lifestyle now. Your goal should be to pay off your debt completely within a year. Oh, and STOP USING YOUR CREDIT CARD!
- Pay off smaller balances first: It’s easier and more motivating to check off the smaller targets first. It will help you build momentum as you tackle the bigger ones.
- De-clutter: It’s probably time to get rid of a lot of stuff anyway. You can raise more money than you think by getting rid of clothes, appliances, old cell phones, CDs, furniture and half the stuff in your garage by putting it all up for sale on E Bay.
- Save any excess cash flow: If you find ways to generate additional income it should be applied to savings. As soon as you reach your debt pay off goal, apply the budgeted debt payment to savings and don’t look back.
Should I just continue working or should I try to earn an income in retirement?
Recent retirees and Boomer pre-retirees have actually began to forge a new normal for retirement by preparing for a new career well before their retirement date. Some have created a “transitional” relationship with their employer, scaling back hours or changing their status to “consultant.” Such arrangements can sometimes extend the working relationship with an employer. Some are branching out to start a business of their own or monetizing a hobby. Many boomers are already planning their new careers by hitting the books and learning new skills.
The prevailing attitude among a growing number of pre-retirees is that they aren’t going to limit themselves by trading a life of work for a life of leisure; rather they are going to take control and trade in work that they no longer want to do, for work they will really like to do. By taking control of their new working life, they are more likely to be able to find an enjoyable balance of work and lifestyle that will sustain them financially, mentally, and psychologically.
*Retirement time bomb: Mortgage debt. Securian research reveals growing burden for boomers and retirees – April 2013
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2014-2015 Advisor Websites.