Financial advisor and educator Stuart Spivak gets it: S.W.A.N. — the “Sleep Well At Night” plan — is something most of us want to achieve when we retire. While there are many concerns surrounding retirement, a major issue is the amount of debt we accumulate. So what’s a great strategy for eliminating your debt before you retire? Stuart suggests breaking down debt by generation.
Debt By Generation
According to a 2021 CNBC report, the average American is over $90,000 in debt. This includes all types of consumer debt, from credit cards and personal loans to mortgages and student loans. Generation X (ages 40–55) has the largest amount of debt compared to Gen Z, Millennials, Baby Boomers (ages 56–74), and the Silent Generation (ages 75-plus).
Broken down U.S. consumer debt and U.S. household debt by age, here are the percentage of families with 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%
- Ages 75+: 49.8%
Top Debt For Baby Boomers
Debt can range from primary mortgage to secondary mortgage, credit debt to home equity loans, and student loans to medical and dental loans. The list goes on and on. It becomes harder and harder to dig out of this hole since retirement income is usually limited and debt seems to be unlimited.
Nearly 20 percent of boomers have more credit card debt than emergency savings. This problem is expected to get worse as interest rates rise. Corporate restructurings, job loss, and other unexpected circumstances could cause an even bigger problem as payments become more difficult to make.
Having sufficient emergency savings is key to protecting yourself from unexpected expenses, as well as rising interest rates, as it becomes more costly to service existing debt. Ideally, Stuart suggests a minimum of 2–3 months of liquid savings held in an interest-bearing account for emergencies and other unexpected expenses. Despite the fact that rates on savings accounts and money markets are still very low, having a sufficient amount of readily-accessible funds is vital due to unforeseen expenses and/or loss of work. Also, having excess cash on hand is always good, helping you take advantage of opportunities if and when they are presented. The saying, “Cash is King” holds true when it is wanted or needed.
First Debt To Pay Off
Due to the potential tax benefits, good debt can be considered your mortgage debt. The interest payments, up to $750,000, of mortgage debt can typically be deducted, if itemizing tax deductions. Nevertheless, all other types of debt (credit cards, medical/dental, furniture loans, etc.) don’t offer any tax benefits and usually have much higher interest rates and, therefore, are more costly to service.
High interest rate debt needs to be eliminated first and Stuart suggests a plan of action to prioritize and organize a debt elimination strategy.
The best way to manage mounting debt is to have a plan of action. Everyone has a plan. Stuart calls the plan that is not in writing and not well thought out the “no-plan” plan. This is a plan but not a plan that works. He suggests a 7 Steps to Financial Freedom process that lays out a plan of action to debt freedom. This plan is in writing and works if followed.
It Is Possible To Be Debt-Free
Here is a recent case study for clients in their late 30s who came to Stuart with over $323,000 in debt (and real debt of over $460,000 after adding all of the interest they were scheduled to pay). This debt included their primary mortgage ($284,000), student loan debt, and an automobile 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, Stuart’s team was able to put together a plan that would get them 100 percent debt-free in 9.4 years and save them over $56,000 in interest. The plan would also create over $1.2 million of additional tax-favored retirement funds at their scheduled retirement date of age 67.
Retirement Debt Elimination Goal
The goal would be to have somewhere between 75–100 percent of your fixed expenses during retirement guaranteed, versus predictable income sources. Guaranteed income is guaranteed, either by the U.S. Government (Social Security, government bonds, etc.) or an insurance company who 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 harder to manage compared to when you are still working. The sooner someone realizes that they want to be debt-free, the better. Time is your friend. Make the decision to prioritize debt elimination so you can S.W.A.N. through your retirement!
This material was prepared by TravelAwaits and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note: investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting, or other professional services. If assistance is needed, 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 may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
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