Debt. The word tends to get a bad rap with a sort of negative connotation, especially when it comes to personal debt. After all, borrowing money is essentially spending money you don’t have. I like to think of debt as a tool. Debt isn’t good or bad, it just gets you from point A to point B. There are circumstances where it makes sense to utilize debt to achieve goals faster, such as buying a home. Most people would find it very difficult to pay for such a large expense with cash. It would take decades to save. Also, it can be strategic to exercise the use of debt for cash flow reasons. For example, consider a couple who want to help a child with college costs but also need to put a new roof on the house. Talk about a cash crunch! Debt is normal, but it becomes cumbersome in retirement.
Debt can be stressful! According to the FINRA Foundation, 24% of retired individuals are financially stressed. Think about it. Every payment made to a bank or a credit card company is money that could be going towards your everyday living expenses. Also, you have less control if circumstances change. What if a spouse dies and your Social Security income decreases as a result? You may not be able to make payments and could be forced to change your standard of living. The worry is not worth it.
Another reason to eliminate debt in retirement is because the interest is expensive. Interest can really be very costly over time, even when interest rates are low. The amount you borrow to take out the loan is very different than the total amount paid on that debt once it’s paid off. For example, a $200,000, 30-year mortgage at 3% interest would result in over $103,000 of interest paid if the loan was held for the full duration. That is some serious money!
Although being debt free in retirement is a good plan for most, it’s not for everyone. You should have enough liquid assets available to pay off your full loan balance at a moment’s notice and still have enough savings and investments to support your future retirement income needs. There are several steps that can be taken to improve debt before you stop working. These include:
• Debt consolidation. Now might be a good time to consider a home equity line of credit to pay off higher interest rate loans and simplify payments.
• Start making extra payments on outstanding loans, which will accelerate the pay-off.
• Analyze spending and cut out expenses where you can. It is easy to improve habits and save when you’re conscious of where the money is going.
• Consider working longer.
Unique to our current environment of social distancing and stay-at-home orders, spending and savings habits have changed. In some cases for the better as travel and recreation have decreased. In other cases for the worse as major home improvement projects get tackled and incomes take a hit! Whatever your situation, it’s never too late to devise a plan and take steps towards achieving debt-free status. Your retirement readiness will drastically improve if you do.
The views expressed represent the opinion of Uncommon Cents Investing. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Investing in equity securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results. Investment Advisory services offered through Uncommon Cents Investing, a Registered Investment Adviser.
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