Getting ready for retirement? Before you can cross that bridge, you’ll need to cross some important items off your to-do list. This handy checklist of ten crucial steps can help you visualize how prepared you are.
□ Retirement Budget
Understand what your income will be, and how you can confidently spend the money you have accumulated for retirement.
□ Emergency Savings
Prepare for emergencies by saving at least 3 months’ living expenses, and have that money easily available to you.
□ Tax Strategy
Have a sound tax strategy to guide you through the process of spending money from both taxable and tax-deferred accounts.
□ Lifestyle and Location
Consider where you’ll live, both short- and long-term. Have a plan for funding a move and understand the timing involved.
□ 401(k) Strategy
Have a strategy for your 401(k) plan and determine the best time for you to access the money, based on your goals.1
□ Bucket List
Write down your personal goals for your retirement years. Explore your dreams, priorities and values.
□ Extended Care
Make arrangements in the event that you or a loved one encounters a health issue requiring full-time care.
□ Estate Strategy
Develop an estate approach that includes how you want your assets to be allocated, and who will handle your estate.
□ Health Insurance
Understand your options with Medicare and define a strategy for covering health care expenses for the long haul.
□ Social Security Strategy
Have a sound tax strategy to guide you through the process of spending money from both taxable and tax-deferred accounts.
If you’re not as prepared for retirement as you’d like to be, just reach out to a financial professional. Together, you can fine-tune these strategies so you can finish your checklist and get started on that bucket list.
1. Distributions from 401(k) plans and most other employer-sponsored retirement plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.
As the head of the household, it’s up to you to make sure that your entire family’s needs are being met. In order to do that, you need to be extremely diligent when it comes to money management basics. This is not something that will happen by accident. Instead, you must plan for it and work toward it.
The first step is to set up your “office.” Gather all of your bills, a calculator, a pencil, and your checkbook.
I would also recommend that you grab an old binder that you can use to keep track of your financial data and a shoebox for storing paid bills.
Now you’re ready to begin:
Go through all of your bills, and pay anything that is due within the next week.
If you have bills coming due that you cannot pay, notify the company and ask them to set up a payment plan with you.
Print a copy of the chart “Paying Down My Debts” or make your own.
On the chart, list all of your debts, including any car loans, student loans, and credit card debt.
In addition, list the total balance left to be paid on all of these debts, and the percentage rate you are paying.
For now, leave the fourth column of the chart blank, and store it in your “Financial Data” binder.
2. Eliminate Joint Debt
Before we create a plan for paying down your debt, it’s important to consider some special circumstances that may apply to you as a single parent. I asked LaToya Irby, Credit/Debt Management Expert, to share her expertise on handling joint debt:
Wolf: Let’s say a single mom still shares a credit card with her ex. What should she do?
Irby: Ideally, she would want her ex to transfer his portion of any joint balances onto his own credit card. That way, everyone is paying for their own debt.
Wolf: What about leaving both names on the account, and agreeing to pay part of the amount due? Is that ever advisable?
Irby: No. If you’ve made an agreement with your ex to split the debt payments on accounts that include your name, and your ex-misses a payment, it’s going to hurt your credit. If the ex-fails to pay altogether, the creditors and collectors will come after you. Not even a divorce decree can change the terms of a joint credit card agreement. In the credit card issuer’s eyes, you’re just as much responsible for post-divorce accounts as before.
Wolf: What about situations when a couple’s divorce decree mandates that one individual must pay off the joint credit card debt, but that person fails to do it?
Irby: You can always file contempt of court papers against him/her, but in the meantime, your credit score suffers. So I suggest paying off the debt to save your credit. If you can’t afford to pay the debt, at least make minimum payments to keep a positive payment history on your credit report.
Wolf: What about other accounts, such as utilities and cell phones?
Irby: The safest thing to do, if you have a service in your ex’s name, is to turn off the account and reestablish service in your name.
3. Find Money to Pay Down Debt
Another thing we have to do before creating a plan to pay down your existing debt is to find money in your budget each month. To assist in this step, I contacted Erin Huffstetler, Frugal Living Expert.
Wolf: How much money do you think the average person can uncover just by being more intentional about spending and budgeting?
Huffstetler: The average person could easily uncover an extra $250 a month—and probably much more.
Wolf: What are the top 5 areas that you think people should look to first when they’re trying to cut their expenses?
Food spending (both groceries and eating out)
TV-related expenses (cable/satellite services, certainly; but also movie subscriptions and rentals)
Phone services (particularly extras like call waiting, caller id, long distance, and cell phones)
Miscellaneous spending (all those small amounts spent on coffee, vending machine snacks, and other indulgences)
Wolf: How can single parents, specifically, stretch their child support dollars and reduce child-related expenses?
Huffstetler: For single parents looking to stretch their child support dollars, creativity is the key. Look to children’s consignment shops and thrift stores to buy your kids’ clothes instead of department stores; sign them up for Parks and Rec-run activities instead of privately-run activities (which will always cost more); and don’t feel like you have to make up for being a single parent by buying them extra things—it’s you they need, not stuff.
4. Pay Off Your Debt
The next step is creating a schedule for paying down your debt:
Pay off the debts that charge you the highest interest first.Bob Hammond, author of Life Without Debt, recommends that you pay off the debts that are charging you the highest interest first since borrowing from those creditors is costing you the most money. “Concentrate on paying off the high-cost debts as soon as possible,” Hammond advises. LaToya Irby, Credit/Debt Management Expert, agrees. “Highest interest rate debts cost the most money, especially when those debts have high balances. So you’ll save money on interest charges when you pay off those high-interest rate debts first.”However, there are exceptions to this general rule. Irby notes, “If you’re likely to get discouraged because it’s taking a long time to pay off that high-interest rate debt, you can start with the lowest balance debt. Getting some small debts paid off will motivate you to keep going.”
Pay more than the minimum payment. Aim for paying more than the suggested minimum payment, in order to pay off your debts as quickly as possible.Miriam Caldwell, Money in Your 20’s Expert, shares this advice:
Choose one debt to focus on.
Increase your payment on that debt by as much as you can.
Once you have paid off that debt, move all that you are paying on it to the next debt you want to pay off.
You’ll be surprised at how quickly you can get out of debt with this plan!
Meanwhile, continue to pay the minimum balance due on all of your other debts.Record what you intend to pay toward each debt on the debt chart you made in Step 1.
5. Budget Your Monthly Expenses
Now that you know where you stand financially, and you’ve created a plan for paying down your debts, it’s time to make sure that you’re making any other necessary adjustments so that you can keep up with your plan. And this means creating a budget.
I know this can be intimidating, but I’m going to make a suggestion for you: Sign up for Mint.com. It’s a free financial software program available on the Internet, and it will basically do your budgeting for you. It will create a visual pie chart showing how much you’re spending each month on housing, gas, food, entertainment, and more. This way, if it turns out that you’re spending a lot more on food than you really should, you can begin to make the necessary adjustments to get your spending under control.
If you would prefer to create your budget the traditional way, allotting a certain amount of money to each spending category, I’ve created an online budget calculator you can use, which includes categories for child support and other details specific to your life as a single parent.
Finally, in taking a look at where your money really goes each month, it’s important to know approximately how much money you “should” be spending in each category. Generally speaking, your net spendable income (after taxes) should be allocated as follows*:
Child Care: 5%
6. Set Financial Goals
Now that you’ve worked out a plan to pay down your debt, and you’ve created a budget, it’s time to determine your needs moving forward.
Specifically, as a single parent, you need to ask yourself some questions, such as:
Do you need to file for child support?
Do you need to get a higher-paying job?
Is it time to think about going back to school?
Do you need to consider moving into a home/rental that would reduce your overall monthly payments?
Are there alternatives, such as taking on another job or splitting expenses with another single parent family, that you need to consider at this point?
One of the things that I want you to know is that the ball is in your court. You determine where this goes from here on out. But unfortunately, you can’t do that if you’re ignoring your financial health, right?
So the fact that you’ve come this far in the process of getting a handle on your finances tells me that you’re determined to make the changes you need to make in order to provide for your family’s future.
So go ahead and ask yourself these questions. So much of single parenting is learning to roll with the punches and be creative in the face of adversity. If, indeed, you need to make some pretty major changes, now is the time to do it. Don’t incur any more debt where you are. Be resourceful, follow through, and do what you need to do to turn your financial situation around.
7. Increase Your Net Worth
The next step is to determine your net worth and begin adding to it.
Determine Your Net Worth:
Your net worth is what you own minus what you owe. Programs such as Mint.com, Quicken, and Microsoft Money will calculate your net worth for you, automatically.
You can also determine your net worth simply by adding up all that you own, including all of your investments, the equity you may have paid into your home, the value of your car, and any other assets you possess; and subtracting what you owe in remaining debts.
Set Up a Savings Account:
Once you know where you stand, you’ll be ready to set up a savings account. You can do this through your regular bank, or begin investing in a mutual fund that pays interest.
Even if you can only afford to set aside $25 or $50 per month, it will begin to add up.
Before you know it, you’ll have an emergency savings plan in place, to protect you in the event that your car breaks down, or your home needs a major repair.
In addition, this regular savings will help you increase your net worth over time.
8. Become Even More Frugal
Unfortunately, all of the work you’ve already done in steps 1-7 will have little lasting value if you don’t change your attitude toward money. Now is the time to become even more frugal and learn to live within your means.
Stop imagining that more money is going to pour in tomorrow—through finally collecting on unpaid child support, winning the lottery, or getting a promotion. If those things happen, great! You’ll be even better off. But living as if they’re going to happen is causing you to spend money you don’t have.
Instead, force yourself to make purchases with cash only. Do not continue to pay outrageous interest payments toward credit cards for purchases you don’t absolutely need. You can get by without that new furniture, right? What else could you skip, in the interest of spending only what you have right now in the bank?
Try These Ideas:
Check Freecycle before you make another major purchase. Someone else may be giving away the very thing you’d like to buy!
When you’re getting ready to buy something specific, look for it on eBay first. I buy a lot of my clothes, new-with-tags, through online auctions!
Forget trying to keep up with “The Jones’s.” You already know your value; don’t get caught up trying to “prove” your worth to others by having “just the right” house, car, or appearance.
Do not use shopping, ever, to appease your emotions.
Finally, when you do go to make a big purchase, step back and give yourself a few days–or even a week–to think about it. There’s no reason to suffer through buyer’s remorse and try to justify to yourself purchases that you really can’t afford. Think it over carefully and make those purchases, when necessary, with cash.
9. Schedule Your Own Weekly Financial Check-In
Grab your calendar and schedule a weekly financial update meeting with yourself. This is an extremely important step in managing your personal finances, and it’s one that you need to continue each and every week. During your “meeting” time:
Pay any bills that are due.
If your bank statement has arrived, take the time to balance your checkbook.
Check the balances of your checking and savings accounts.
Update your debt list to incorporate any recent payments.
This is also a good time to write out your grocery shopping list and check what’s on sale at your local grocery store this week (either using the store’s Web site or the sales circular that comes in the newspaper).
Finally, also make note of any upcoming expenses you need to anticipate and plan for.
Warren Buffett is generally considered to be the best long-term investor of all time, so it’s no wonder many people like to listen closely to Buffett’s words of wisdom, in order to apply them to their own lives. With that in mind, here are seven of the best personal finance lessons I’ve learned from Warren Buffett over the years.
1. “Someone’s sitting in the shade today because someone planted a tree a long time ago”
The lesson here is to be a forward thinker when it comes to personal finance, whether you’re talking about investing, saving, or spending. When you’re deciding whether to put some more money aside for emergencies, think of a financial emergency actually happening and how much easier your life will be if you have enough money set aside.
Similarly, few people get rich quick by investing, and most people who try end up going broke. The most certain path to wealth (and the one Buffett took) is to build your portfolio one step at a time, and keep your focus on the long run.
2. “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years”
In addition to this, one of my all-time favorite Warren Buffett quotes is “our favorite holding period is forever,” which is also one of the most misunderstood things he says. The point isn’t that Buffett only invests in stocks he’s going to buy and forget about — after all, Buffett’s company Berkshire Hathaway sells stocks regularly, and for a variety of reasons. Rather, what Buffett is saying is to invest in stable, established businesses that have durable competitive advantages. That is, approach your investments with the long term in mind, but keep an eye on them to make sure your original reasons for buying still apply.
3. “Price is what you pay; value is what you get”
When you’re buying an investment (or anything else for that matter), the price you pay and the value you receive are often two very different things. In other words, you should buy a stock if you believe its share price is less than the intrinsic value of the business — not simply because you think the price is low.
For example, if a market correction hit tomorrow and a certain stock were to fall by 10% along with the overall market, would the business inherently be worth 10% less than it is today? Probably not. Similarly, if a stock rose rapidly, it wouldn’t necessarily mean that the value of the underlying business had risen as well. Be sure you consider value and price separately when making investing decisions.
4. “Cash … is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent”
One of the reasons Berkshire Hathaway not only survives recessions and crashes, but tends to come out of them even better than it went in, is that Warren Buffett understands the value of keeping an “emergency fund.” In fact, when the market was crashing in 2008, Berkshire had enough cash on hand to make several lucrative investments, such as its purchase of Goldman Sachs warrants.
Granted, Berkshire Hathaway’s rainy-day fund is probably a bit bigger than yours; Buffett insists on keeping a minimum of $20 billion in cash at all times, and the current total is around $85 billion. However, the same applies to your own financial health. If you have a decent stockpile of cash on the sidelines, you’ll be much better equipped to deal with whatever financial challenges and opportunities life throws at you.
5. “Risk comes from not knowing what you’re doing”
In Buffett’s mind, one of the best investments you can make is in yourself and the knowledge you have. This is why Buffett spends hours of every day reading, and has done so for most of his life. The better educated you are on a topic, whether it’s investing or anything else, the better equipped you’ll be to make wise decisions and avoid unnecessary risks. As Buffett’s partner Charlie Munger has advised: “Go to bed smarter than when you woke up.”
6. Most people should avoid individual stocks
This may seem like strange advice coming from Warren Buffett, since he’s widely regarded as one of the best stock-pickers of all time.
However, Buffett has said on several occasions that the best investment for most people is a basic, low-cost S&P 500 index fund, like the one he is using in a bet to outperform a basket of hedge funds. The idea is that investing in the S&P 500 is simply a bet on American business as a whole, which is almost certain to be a winner over time.
To be clear, Buffett isn’t against buying individual stocks if you have the time, knowledge, and desire to do it right. He’s said that if you have six to eight hours per week to dedicate to investing, individual stocks can be a smart idea. If not, you should probably stick with low-cost index funds.
7. Remember to give back
Warren Buffett is a co-founder of and participant in The Giving Pledge, which encourages billionaires to give their fortunes away. Buffett plans to give virtually all of his money to charity, and since he signed the pledge, he has given away billions of dollars’ worth of his Berkshire shares to benefit various charitable organizations.
Buffett once said, “If you’re in the luckiest one percent of humanity, you owe it to the rest of humanity to think about the other 99 percent.” And even if you’re not a member of the 1%, it’s still important to find ways to give back.
You’ve padded your emergency fund, paid off your debt and saved up a few thousand dollars – $5,000 to be exact – that you’re ready to invest. But is it best to put it in a mutual fund, certificate of deposit, index fund or exchange-traded fund?
“If you’re asking what’s the best way to invest $5,000, it’s kind of like asking what should I have for dinner tonight? Well, it depends,” says Greg McBride, chief financial analyst of Bankrate. “What do you like? What don’t you like? Do you have any allergies? What are you in the mood for? The same thing [applies] here.”
Before you get to specifics, such as how much risk you can stomach or what to choose off the menu of investments, start with the basics.
“The first question you need to ask yourself is, ‘When do I need to spend that money?’” says Manisha Thakor, founder and CEO of MoneyZen Wealth Management. “My rule of thumb is investing is something you do for the long run, which I would define as a minimum of five years and ideally 10-plus years. Once you are sure it’s long-term money, now you’re ready to really get into the nuts and bolts.”
To help you delve into those nuts and bolts, we asked financial experts for advice on the best way to invest your $5,000. They suggested options for both the short and long term, if you’re hoping to grow that money for retirement decades down the road.
Online savings account. The best place for money you need in a moment’s notice is an online savings account, McBride says. Even though interest rates for online savings accounts are low – hovering around 1 percent – they “pay the best returns relative to the savings account offers among all the financial institutions,” he says. The returns currentlycompare to those of CDs, but without the early withdrawal penalties.
CDs and money market accounts. If your time horizon is less than five years, Thakor recommends putting the money in a CD with a maturity date that matches your goal. This option may be ideal if you have a low risk tolerance, since CDs are insured by the Federal Deposit Insurance Corp. up to $250,000 per depositor. The downside? You can’t touch those dollars for a predetermined time without paying a penalty.
Alternatively, money market accounts, which are also insured by the FDIC, earn slightly less interest than CDs, but you can withdraw the money at any point. Just keep in mind that interest rates are generally inversely correlated with access to your money. As Thakor puts it: “If you want unlimited access to your money, you’ll get slightly lower rates. If you don’t mind tying it up for a defined period of time, which is what you do with a CD, then you can get a slightly higher rate.”
Given their low yields, CDs and money market accounts are better for shorter-term investments, since they don’t always keep up with the cost of inflation. “Even though on paper it might look like you’re protecting your principal and [your] deposit is growing a little bit in value, you’re actually losing ground because the purchasing power is not holding,” says Paul Granucci, a financial solutions advisor with Merrill Edge.
Actively managed mutual funds. Investors with a longer time horizon can afford to take on more risk for a greater return by putting their money in the stock market. Mutual funds offer an easy way for investors to gain exposure to a broad range of stocks. If picking stocks makes you nervous, fear not. With actively managed funds, a fund manager makes all the decisions for you, including what sectors of the economy to invest in and which companies are undervalued or poised for growth. But beware: Mutual funds come with fees. The average actively managed stock fund charges an annual fee of 1.26 percent, according to fund tracker Morningstar, and Thakor advises against buying mutual funds with an expense ratio of more than 1 percent.
If you do go the actively managed route, Granucci recommends a globally balanced mutual fund, which is diversified in stocks, bonds and cash and contains domestic and international investments.
Index funds. “If the goal is to try to achieve a lot of diversification and build a portfolio that you can more or less kind of set and forget, it’s hard to beat index funds,” says Christine Benz, director of personal finance for Morningstar.
With index funds, you don’t have the opportunity to beat the market, but you can keep up with the market, “which is not a bad place to be given that most active fund managers do not outperform their benchmarks over long periods of time,” Benz adds.
Thakor points out that index funds are the healthiest option on the menu – without organic food prices. “Index funds are the financial equivalent of a superfood like chia seeds or kale,” she says. “Depending on what type you pick … you can get exposure to literally thousands of stock and bond issues at a very nominal fee.” The average expense ratio for stock index funds is 0.75 percent, according to Morningstar.
ETFs. Mutual funds and ETFs are very similar. “When you buy one share of an ETF or one share of a mutual fund, you’re buying a small piece of a lot of different investments that make up that fund,” Granucci explains. “The difference is how they are managed.”
There’s no active management with ETFs, so if you’re thinking about investing in a handful, be prepared to rebalance your portfolio at least once a year (mutual fund portfolios should be rebalanced, too). Advantages include costs that are a lot lower than those of mutual funds (Morningstar reports ETFs have an average annual fee of 0.57 percent) and no minimum investment requirements. While mutual funds may demand initial investments of $1,000 or $3,000, ETFs – which are traded on exchanges and fluctuate in price during the day – cost only their current trading price, like stocks.
ETFs offer exposure to asset classes ranging from bonds to domestic and international stocks, and even alternative investments like commodities. “Instead of trying to do one fund that’s going to do it all, you might need to find three or four ETFs that are going to fill all the different buckets that you want to hit,” Granucci says.
You might be ready to put that $5,000 to work, but before you settle on one of the above investments, McBride points out three places where your money would be better spent:
1. Paying down high-interest debt.
2. Saving for retirement in a tax-advantaged account, such as a 401(k) or individual retirement account.
3. Starting an emergency savings fund that covers six months of living expenses.
“For the vast majority of Americans, tackling those three priorities is going to more than chew up that $5,000,” he says.
And there’s a reason why paying debt is at the top of the list: You’ll get a higher risk-free rate of return by paying down credit card debt than you will investing in financial securities. As McBride says, “Paying off a 15 percent credit card balance is like earning 15 percent risk-free.”
But let’s assume you’ve paid off your debt, contribute to a 401(k) or IRA and have enough savings for a rainy day. Now you’re ready to sit down at the table. The experts might have different tastes, but they all agree on one thing: You have to know what you’re ordering.
In other words, if you don’t understand what you’re investing in, you might make some mistakes.
“The power of investing comes from compounded returns and time, and if you don’t understand what you’re doing and you’re afraid to ask questions, when the inevitable hiccup comes in the market,” Thakor says, “you will be more likely to change your course.”
Copyright 2015 U.S. News & World Report
Written by Stephanie Sternberg of U.S. News & World Report
While some of us may be struggling just to afford a down payment, there are people out there who are paying for their homes in full in cash. Finding a great property and forgoing all the bank paperwork and loan repayments may seem like a dream, but it can, in fact, be a mixed blessing. So, if you are looking to buy a home and could afford to pay all cash for it, should you?
Running the Numbers
A great place to start in this process is figuring out how much money you would save buying a home in an all-cash payout versus with time-based loan payments. Compare the sticker price to the eventual price tag of your home if paid for with a 15- or 30-year fixed mortgage with a down payment of around 20%. You will save money on interest, but it’s a good idea to factor in the loss of the mortgage interest deduction when it comes to tax time. Also, consider what paying in cash will do to your savings — emergency, retirement and otherwise — in the short term.
If you truly have the money available immediately and it won’t put you in jeopardy of going into debt if an emergency were to come up, you will most likely save money by not paying interest on a loan. You will also avoid all of the paperwork that comes with securing a loan, pesky closing costs and the often-frustrating loan process.
Your credit history also will not come into play, which may be beneficial if you have a shaky credit past or have run into trouble before while still having considerable savings. (You can check your credit scores for free on Credit.com to see where you stand.) You will also have available equity in your home that you could likely tap in case you hit tough financial times. Furthermore, you can only lose the amount of money you have put in because you are not leveraged, meaning you do not need to get as concerned about market fluctuations.
Another benefit is mostly psychological — you actually own your house, giving you a sense of security and pride. Probably most importantly, you are a very attractive buyer to motivated sellers, giving you an edge over other buyers. The deal will be simpler and faster for both sides and buying in cash may even put you in a position you to get a better deal. After all, time is money.
Paying cash for your home likely means most of your savings or at least a lot of your money will be tied in one asset, leaving less money to invest in other, diversified assets. Also, real estate has a historically lower return on investment than stocks or bonds, meaning you could be losing out overall if other investments would have outperformed the interest on a mortgage.
Additionally, you are sacrificing liquidity, so it’s probably only a good idea to buy a house with cash only if you can afford it without emptying your emergency fund. A home can take months to sell, and borrowing against your home’s equity brings fees and borrowing limits into the equation. You further lose the financial leverage a mortgage provides because your payment is locked in and hopefully received a favorable interest rate. Lastly, you will not qualify for the tax deductions mortgage payers receive, which often total over $10,000 when itemized.
How you pay for your home is a very personal decision and paying in all cash will likely work for some people but not for others. This generally makes sense if the home’s price does not subtract a significant portion of your liquid assets and/or the interest rate you would pay on a mortgage is higher than what you could earn on other investments. It’s important to properly assess your financial situation and long-term investment strategies, the drawbacks as well as the benefits.
Bora Paloka, a 65-year-old former hairstylist in New York City, is not living the type of retirement her husband and she had always imagined. For the past five years, the couple has been using welfare money to cover basic monthly expenses, and to make matters worse, the credit card debt she entered retirement with has ballooned.
Saving enough money to retire comfortably has long been the goal of the American worker as pension plans have disappeared. But now an added wrinkle complicates the scenario for those like Paloka: retirees are increasingly entering their golden years with crippling debt.
Households headed by those 75 or older saw debt double to $27,409 in 2010 compared to $13,665 in 2007, according to the Employee Benefit Research Institute (EBRI). And it’s not just mortgage debt that poses the problem: credit card and student loan debt are stifling retirees’ plans for leisurely days on the golf course followed by 5 o’clock margaritas.
Coping with this sort of debt does not leave Americans in a solid position to exit the workforce: 82% of workers aged 60 and older expect to or are already working past age 65, according to the May 2015 survey of the Trans American Center for Retirement Studies. Among them, 56% believe they will not be able to afford to retire because of their income or health benefit requirements.
Of course, for those forced into an early retirement, the obstacles increase: life expectancy has lengthened, and the typical consumer needs to be able to cover costs incurred during 30 plus years of retirement.
The best way for Americans to tackle debt in retirement is to develop a strategy and time line so they can attack the most troublesome debt first. It’s also important for them to consider taxes, retirement portfolio withdrawals and income streams so that they don’t outlive your money or leave heirs with outstanding loans.
Prioritize Your Debt
If you have multiple debt burdens, choosing which obligation to attack first is important.
Tackling high interest credit card debt, whether the charges were for a necessity or indulgence, is a must, according to Michael Conway, CEO of Conway Wealth at Summit Financial Resources in Parisppany, N.Y. If a retiree has multiple credit cards with debt owed, he should first pay off the one with the highest interest rate and then work his way down. This is what personal finance experts call “the avalanche method.”
Next up, take care of student loan debt, a pesky phenomenon that’s increasingly rearing its ugly head into retirement for many Americans. With education costs only increasing each year, student loans now make up a large portion of retirees’ total non-mortgage debt, according to the study by Limra Secure Retirement Institute: individuals aged 65 to 75 have six times the student debt compared to 25 years ago.
Financing a college education for yourself or your children is a priority to most looking to increase earning potential over a lifetime, but luckily, this debt can move down your list of priorities because of the low interest rates on education loans — typically from 1.5% to 8.8% for private loans and currently 3.86% for federal loans.
Student loan consolidation can simplify your bill to one streamlined payment and give you more time to pay off the loan. When choosing whether to consolidate a loan or not, retirees should compare their current monthly payments with the monthly loan payment for the consolidated bundle and ask whether they can afford to pay loans for the next couple of decades.
Mortgages are the big X-factor when considering entering retirement with debt. Generally speaking, it’s safe to pay the monthly amount owed on your mortgage while you tackle paying off your credit card and student loan obligations; once you’re squared away on those debts, you can work toward paying your house off in full. That’s because with a fixed mortgage, prices remain the same and don’t increase with inflation. That decreased urgency to pay off the debt, coupled with the fact that homeowners get a tax a break on their mortgage interest payments, makes this debt more palatable and less destructive to a retiree’s bottom line. To boot, the mortgage you took out will appreciate in value and is considered good debt, as opposed to bad debt, the money you charged to take that weeklong trip to Cancun. (That exception for mortgage debt is an adjustable rate mortgage, an ARM, which should be paid off sooner rather than later, because of the increasing interest rate over time).
The option of refinancing your home in retirement can cut down your monthly costs and help in your quest to paying off your mortgage. Lower rates come through from changes in market conditions or an improved credit score. But caveat refinancer: refi does have costs and fees like a 3% to 6% refinancing fee on your principal balance.
A reverse mortgage can bring in some steady cash flow and access home equity slowly over the years. This route comes with costs, depending on the size of your loan, like upfront mortgage insurance and real estate closing costs. Mortgage insurance adds an additional 1.25% on top of an adjusted interest rate.
If all else fails, downsizing your home is an economically efficient way to save some cash for retirement and free yourself of burdensome debt. A realtor can help with costs of selling your home and buying a new cozy condo for two.
During the first year of retirement, couples usually spend the equivalent of 75% to 85% of what their income was, mainly on home, food and health-related expenses — decreasing that expenditure level as they head deeper into retirement. Retirees should look at income and tax brackets to help determine what strategy to take for monthly spending and withdrawals from retirement accounts, according to Neil Krishneswamy of Exencial Wealth Advisors in Plano, Texas.
Financial advisors would caution retirees, with credit card debt, of over-splurging in their first retirement years. Non-deductible and with high interest rates, credit card debt will financially stunt you if not paid off early in retirement. More friendly debts, like mortgage debts, can be left to simmer while you pay them off slowly throughout your 70s and 80s.
“Some people are comfortable with having debt during retirement, but it’s good to have other means to control tax burden,” said Krishneswamy, specifically referring to the trusty mortgage interest deduction.
Alternative accounts like an emergency fund for back up can soften up the debt burden for the future.
Of course, diversity of investments is key: Krishneswamy says that if all your investments are in a 401(k), then any distribution you make from investments comes from a 401(k). “If there is no flexibility, then there is a higher tax burden,” he says.
That’s why multiple streams of retirement planning vehicles are of the essence: retirees older than 59.5 can start making withdrawals from their traditional IRAs with no penalty. Withdrawals are subject to state and federal taxes but can be used toward paying down debt. Those with a Roth IRA are not subject to the same tax burden, as a consumer with such an account has already paid taxes on contributions.
In Brooklyn, N.Y., Sunny and Mary Gianetto use their Social Security earnings and tax free annuities from financial companies they invested in to stay afloat in retirement and pay off their obligations.
Sunny Gianetto retired at age 65 and his wife at 62. Now at 80 years old, Sunny hopes to exceed his monthly budget through additional earnings, because his Social Security check won’t do it alone. “The wonderful people in Washington give us a raise every year and the increase comes in January, but it’s not enough,” he said.
The Gianettos have monthly expenses of car insurance and home maintenance to pay for. “If we didn’t have the tax free investments, we would be in trouble,” Mary said. Both husband and wife try to plan smart for the future and have a monthly budget.
For people burdened by excessive debt in retirement, sometimes drastic measures like moving are necessary to find tax advantages. That can make all the difference in chipping away at the debt and moving toward a financially independent lifestyle.
Conway says to consider moving out of a state unfriendly to tax advantages, like New York with a high income tax rate of 8.82%, to a tax friendly state like Arizona, with a 4.54% income tax rate. All the better, retirees can head to states like Nevada and Florida, which have no income tax rate. Retirees may often look to migrate to warmer climates, but they shouldn’t make the mistake of moving to one of the top least tax friendly states like California- 13.3% income tax rate.
Moonlighting for More Cash: Real Talk
If you have debt, you should try to hold off on retirement, says Sergey Kuznetsov of AXA Advisors in New York City. That’s a strong opinion urging people who exit careers with debt to find a side hustle or alternative income stream.
But it’s a realist policy, given that people who retire in their 60s need to have money for the next three to four decades.
“If you want to make sure you have enough money for retirement, you have to stick to a monthly game plan,” Conway says. Therefore, individuals who are about to retire with an unpleasant amount of debt should consider working longer or seeking part time work after retirement to keep up with monthly payments.
That’s exactly the strategy Paloka has employed when trying to whittle away at her credit card debt.
Fearful that her four children will inherit her credit card debt, she began knitting for Hania Bytloi, a company that sells handmade knitwear. “I sometimes work through nights to finish the products,” she said.
With her husband selling a few books here and there, the Palokas are still unable to pay for everything and go to their children for help. “My eldest daughter helps pay for my credit card debt, but she is constantly late on the payments, which puts me back even more,” said Paloka.
There’s not a one-size-fits-all strategy here, of course.
“It’s like a little game of chess or jigsaw puzzle, and you need to ask yourself, ‘What’s the best thing you can do with your money?'” Kuznetsov says.
Your financial health, just like your physical health, is built on dozens of small, daily decisions that eventually form habits. And while eating better and exercising more are well-known habits that will get you fit, sometimes the money habits that lead to financial health are much less obvious — though both topics can inspire plenty of debate.
While every person’s financial situation is different, there are still habits that will nearly always have a positive impact on your money. These are the 30 essential money habits you can follow each day, week or month to get control over your money and build wealth instead letting your finances control you.
For financial health and wealth, adopt these 30 good money habits.