Retirement

Most of us will spend the majority of our adult lives saving for retirement.  Some scrutinize their accounts closely while others trust an advisor or company with the task of managing their retirement nestegg.

Much attention is given to risk-management, investing and estate planning, but little is said about the effects of debt with regard to retirement. Even if you have an existing debt plan it probably focuses narrowly on credit cards, leaving the largest long-term obligations like mortgage and education debt to sap income and earnings far into your retirement years.

You CAN be debt-free using the same payments you’re making now.  In the bargain, you could restore, grow and maximize your retirement plan!

Whether or not you have debt, HUG financial coaches are available to assist you with your retirement plan at every step – from finding a few savings dollars in the budget to providing secure lifetime income and beyond.

Something to think about…

Take a moment to tally the amount you make in loan payments monthly. Include your mortgage, education loans – all debt. Now… Imagine having that amount in your pocket.

Paying your debt off early means less of your retirement dollars go to creditors, and your retirement portfolio has greater longevity and spending power.

Retiring Debt Provides Flexibility

Harnessing payments no longer owed to creditors affords choices. You may choose to work less or perhaps you’d invest those funds toward your retirement or other goals. Wouldn’t that feel better than sending that money to creditors?

Here’s an example based on monthly debt outlay of $3000.

Let’s assume total monthly debt payments of $3000 ($36,000 annually) and a 25% tax bracket. This requires earning $48,000 simply to cover the debt payments. ($48,000 – 25% = $36,000).

Simply put, paying off debt presents options.

  1. Earn $48,000 LESS per year and sustain the same lifestyle
  2. Commit that income to savings
  3. Find a happy compromise

Even at a rate of 3%* $36,000 would grow to $114,610.57 in 3 years, $196,862.75 in 5 years and $425,080.64 in 10 years.

Rolling back the debt train is one way we help our clients retire comfortably.

* Projected rate of return of 3% simple interest with annual contributions used for illustrative purposes only

Retirement/debt risks to consider:

  1. Cosigned or parent loans in delinquency will harm your credit.
  2. Every dollar paid to a creditor is a dollar that never sees market growth, and depletes your retirement account proportionately.
  3. Refinancing to pay for college puts your home at risk.
  4. Property value fluctuations may prevent you from selling or refinancing your home.
  5. If you're unable to meet monthly mortgage payments, you risk losing your home due to the education debt mounted on the property.
  6. A new loan means new terms. This means you will likely be paying less toward principal per payment than on your previous mortgage.
  7. Should you extend the term of your loan you may substantially increase the total amount of interest you pay.
  8. The appeal of using your home’s equity to finance college is tax-deductible interest. That may be cold comfort however, should you desire access to that equity during retirement years.

 

Did You Know…

  • Borrowers over 60 carry more than half the outstanding student debt today? 1
  • According to the Consumer Financial Protection Bureau “Student loan debt among older consumers has increased, in large part, due to the growing number of parents and grandparents participating in the financing of their children’s and grandchildren’s college education.” … an increasing number of older Americans are financially struggling because of the growing amount of debt they owe in their retirement years. 7



More interesting facts about how debt can threaten your retirement plans.

  • Two children in college at $20,000 per year can generate $160,000 in Parent Direct PLUS loans. The standard 10 year repayment plan would have monthly payments of about $1,800. “Even [if the loans qualified for IBR] then, a family of four with a combined AGI of $80,000 will still have a monthly payment of around $1,000 a month – paying back a total of more than $300,000 including interest. Loan debt like this can affect retirement savings, or even retirement itself.” 2
  • Education debt surpassed credit card debt in the U.S. for the first time in 2010? 3
  • Parents have even fewer repayment options available than students? 4
  • Parents are paying more than 10 percent this year for a PLUS loan. (For the 2016-2017 school year PLUS loans taken out by parents have a 6.31 percent fixed interest rate and there is also a 4.276 percent fee tacked on to that.) 5
  • CBS report warned as far back as 2012, “Parents can't shake the debt” and “In fact, the amount owed will balloon when the loans go into default.” PLUS loans have no borrowing amount cap, a 4% origination fee... Short of severe delinquency or bankruptcy, the federal government doesn’t consider parents' ability to repay PLUS loans, and holds the power to garnish wages, offset Social Security benefits and seize tax refunds. 6
  • From 2005-2015 the number of borrowers age 50-64 rose by 119% while the amount of outstanding Federal Student Loan balances increased by 323%! ii  That’s exclusive of private and other education-related debt.

 

“This would be a much better world if more married couples were as deeply in love as they are in debt.”
– Earl Wilson