SWAN is something most of us want to achieve when we retire: the “Sleep Well At Night” plan. While there are many concerns surrounding retirement, a major issue is the amount of debt we accumulate. So what’s a great strategy to eliminate your debt before you retire? We started by dividing the debt by generation.
Debt by generation
According to a 2021 CNBC report, the average American has over $90,000 in debt. This includes all types of consumer debt, from credit cards and personal loans to mortgages and student loans. Gen X (ages 40-55) have the most debt compared to Gen Z, Millennials, Baby Boomers (ages 56-74) and the Silent Generation (ages 75+).
Breaking down US consumer debt and US household debt by age, here is the percentage of households in debt, as recently reported by the Federal Reserve:
- Ages 35-44: 86.2%
- Ages 45-54: 86.6%
- Ages 55-64: 77.1%
- Ages 65-74: 70.1%
- Age over 75 years: 49.8%
Bigger debt for baby boomers
Debt can range from primary mortgage to secondary mortgage, credit debt to home loans, and student loans to medical and dental loans. The list goes on and on. It becomes increasingly difficult to get out of this hole, as retirement income is often limited and debt appears to be unlimited.
Nearly 20% of boomers have more credit card debt than emergency savings. This problem is expected to worsen as interest rates rise. Corporate restructurings, job losses and other unexpected circumstances can cause an even bigger problem as payments become more difficult to make.
Having sufficient emergency savings is critical to protecting yourself from unexpected expenses as well as rising interest rates as it becomes more expensive to service existing debt. Ideally, I suggest a minimum of 2-3 months of net savings held in an interest-bearing account for emergencies and other unexpected expenses. Although savings accounts and money market rates are still very low, having a sufficient amount of readily accessible funds is vital due to unforeseen expenses and/or lost work. Also, having excess cash on hand is always good, helping you to take advantage of opportunities if and when they present themselves. The saying “Cash is King” is valid when it is wanted or needed.
first debt to pay
Due to the potential tax benefits, good debt can be considered your mortgage debt. Interest payments, up to $750,000, of mortgage debt are typically deductible, if itemizing tax deductions. However, all other types of debt (credit card, medical/dental loan, furniture loan, etc.) .
High interest rate debt needs to be eliminated first and I suggest an action plan to prioritize and organize a debt elimination strategy.
The best way to manage growing debt is to have a plan of action. Everyone has a plan. I call the plan that is not written and not well thought out the “no plan” plan. This is a plan, but not a plan that works. I suggest our 7 Steps to Financial Freedom process, which lays out an action plan for debt freedom. This plan is in writing and works if followed.
This IT IS Possible to be debt free
Here’s a recent case study for customers in their late 30s who came to us with over $323,000 in debt (and actual debt of over $460,000 after adding up all the interest they were scheduled to pay). That debt included his primary mortgage ($284,000), student loan debt, and an auto loan. Assuming they made no changes to their current plan, they were scheduled to be debt-free in 24.4 years. After meeting with them and identifying the inefficient dollars they were spending, we were able to put together a plan that would have them 100% debt-free in 9.4 years and save over $56,000 in interest. The plan would also create more than $1.2 million in additional tax-advantaged retirement funds at the scheduled retirement date at age 67.
Retirement Debt Elimination Target
The goal would be to have somewhere between 75 and 100 percent of your fixed expenses during retirement guaranteed, compared to predictable sources of income. The guaranteed income is guaranteed, either by the US government (Social Security, government bonds, etc.) or by an insurance company that can provide these guarantees. Predictable income would be corporate pension plans, dividend-paying stocks, bonds or rental income. It’s predictable, but not guaranteed. Having a combination of guaranteed income and predictable income would be the best of both worlds!
Debt in retirement is more difficult to manage compared to when you are still working. The sooner someone realizes they want to be debt free, the better. Time is your friend. Make the decision to prioritize debt elimination so you can SWAN during your retirement!
This material has been prepared by TravelAwaits and does not necessarily represent the views of the presenter or its affiliates. This information has been derived from sources believed to be accurate. Warning: investing involves risk, and past performance is no guarantee of future results. The publisher is not involved in providing legal, accounting or other professional services. If assistance is required, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and cannot be used to avoid any federal tax penalty. This is not a solicitation or recommendation to buy or sell any investment or insurance product or service and should not be construed as such. All indices are unmanaged and are not illustrative of any specific investment.
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