Written by Gregory Palacorolla, CFP ®
Who doesn’t want to live debt- free?! While it is an excellent practice for anyone, it is especially beneficial for retirees. Retirement is supposed to be drinking wine with friends, taking walks through the gardens or on the beach, traveling to new destinations, and enjoying your grandkids. Like a thief in the night, debt can rob you of all of this, fill you with anxiety, and threaten your happiness. The way to put debt behind bars is simple: optimize your limited income stream through careful planning and making smart financial decisions.
Say Goodbye to Consumer Debt
Consumer debt is what you owe as a result of goods or services you acquire. It is also referred to as consumer credit. There are two primary types: credit cards (revolving) and fixed-payment loans (non-revolving). Most non-revolving debt is auto loans or student loans. Consumer debt can also come in the form of personal loans or money owed to friends/family.
In January 2019, U.S. consumer debt rose 5.1% to $4.035 trillion, $2.976 trillion of which was non-revolving debt. Credit card debt totaled $1.058 trillion as reported by the Federal Reserve. According to a recent study, 42% of Americans age 56 to 61 have debt, with an average amount of $17,623.
Not only do these debts strain your cash flow limiting your savings ability, but it also erodes your ability to build wealth. Interest accrues on debt. If you aren’t careful, it can swallow you whole. The goal should be to pay off consumer debt, especially high-interest debt, as soon as possible. Then avoid racking any up again.
Refrain from Being the Bank to Family/Friends
Lending money can cause just as much trouble as borrowing or spending money. Friends, adult children, other family members may come knocking at your door during times of need. If you find yourself in a situation where you want to help and don’t want to say no, structure a promissory note with terms outlined so the person you are lending money to understands there is an expectation that the money is paid back. You can also gift money if you are in a healthy enough financial position to do so, and you are not going to expect repayment or harbor negative feelings towards them for not paying you back. Don’t put yourself in a position where you can’t pay your own bills because you are paying someone else’s.
Limit Medical Debt
Medical debt is a growing problem for retirees. The average amount a retiring 65-year old will pay out of pocket over the course of retirement is $280,000. Securing comprehensive health insurance should be a vital component of your retirement plan.
HSAs let you save pre-tax money in an account and spend them tax-free on medical expenses, vision, dental care, and prescription medications. If you switch to a new HDHP or keep your existing one via COBRA, you can continue to put money into your HSA. The contribution limit for 2019 is $3,500 for single and $7,000 for family. You can also siphon money monthly into a savings or money market account earmarked for emergencies such as unexpected medical expenses.
You should also have a solid understanding of what Medicare covers. Long-term care isn’t covered by Medicare. The average annual cost in 2018 was $48,000 for assisted living, $50,340 for a home health aide working 44 hours a week, and $100,380 for a private room in a nursing home, according to long-term care insurer, Genworth. Hopefully, you secured a long-term care policy while you were young and healthy since that is when premiums are more reasonable. Most people, on average, need long-term care for about three years. Consider a policy with a three-year benefit period with inflation protection built in. Shared-benefit riders allow you to pool long-term care benefits for a specified number of years and split them as needed between you and your spouse. Hybrid policies combine long-term care and life insurance benefits. If you don’t need care, your heirs will receive a death benefit when you die.
Go Mortgage Free
If you are approaching or in retirement and paying off your mortgage will improve your cash flow, you may want to consider doing so. Now that the standard deduction on federal tax returns has doubled, most are less likely to deduct their mortgage interest. Also, after taxes and inflation are factored in, the spread between the long-term return from investing and the return you get from paying off your mortgage may be minimal. If paying the mortgage in full is not a viable option, you can refinance to a shorter term. Your monthly payments will increase, but you’ll pay off the mortgage faster, pay less in interest, and build equity quicker. You can also add principal to your monthly payments, enroll in a biweekly mortgage payment, or make an extra payment or two each year.
Even a little goes a long way. Kiplinger referenced a great example in one of their recent articles. “A $225,000 mortgage at 5% over 30 years is a monthly payment of roughly $1,200 (excluding taxes and insurance). You would pay $210,000 in interest over the life of the loan. If you put an extra $100/month toward it, you’d save almost $40,000 in interest and pay off the loan 5 years early.”
Downsizing, renting, or relocating to a retirement friendly state with a lower cost of living are other options available to retirees. Renting frees you up from having to deal with maintenance problems or large unexpected costs.
Be Vigilant in Your Planning Efforts
Create a retirement budget. Review the last 12 months of expenses and realistically assess what your true mandatory monthly expenses are. Once you know that, you can begin allocating whatever is left toward leisure activities such as travel. Stay within recommended and reasonable limits where spending is concerned. The U.S. Department of Labor recommends that in retirement, you should spend no more than 34% of your money on housing (utilities, maintenance, and insurance), 16% on transportation, and 14% on healthcare. A general rule of thumb is that spending 4% of your retirement savings every year, is reasonable, provided you have a decent nest egg to withdraw from. Another rule of thumb is if you replace 75% to 80% of your current gross income with income from Social Security, investments, pensions and annuities, you should be able to maintain your lifestyle in retirement.
The disappearance of a steady paycheck can be scary. However, proper planning and a strong push to eliminate debt can replace that fear with confidence. Consulting with a Certified Financial Planner who has experience working with pre-retirees and retirees is a step in the right direction. Feel free to reach out to us anytime.
Sources: U.S. News-Money/ Kiplinger/ Federal Reserve/ Genworth/ Retirement Living
© Geier Asset Management, Inc. April 2019. Gregory Palacorolla, CFP ® is Director of Wealth Management for Geier Asset Management, Inc., a Registered Investment Advisor. The articles & opinions expressed in this material were gathered from a variety of sources, but are reviewed by Geier Asset Management, Inc. prior to its dissemination. All sources are believed to be reliable but do not constitute specific investment advice. The views expressed are those of the firm as of April 2019 and are subject to change. These opinions are not intended to be a forecast of future events, a guarantee of results, or investment advice. Any advice given is general in nature and investors must consider their own individual circumstances. In all cases, please contact your investment professional before making any investment choices. Geier Asset Management, Inc. is not responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.