Last Week’s Question of the Week: What is the estimated cremation rate expected to be by 2035? ANSWER: According to the National Funeral Directors Association, they estimate by 2035 the cremation rate will be nearly 80%.
HOST: I know that as you help people plan for retirement one issue that comes up for you is the amount of debt that people carry on their balance sheet, is that correct?
KLAAS FINANCIAL: Yes, for many debt continues to be something that really does hang on and we would like today to suggest reasons why choosing to be debt free in retirement is truly the best choice and how it will provide more options as you begin the next season of your life.
There are a few steps to remember as you work to achieve this:
- Set up a plan. Listen to Dave Ramsey if you are unclear as to the importance of this. You may need to change your lifestyle and spending habits which requires that you start today to set realistic goals. but it does mean being both aggressive about paying down your debt, changing your lifestyle and then making sure you start saving on a regular basis. When in doubt, many behavioral finance experts suggest putting the two habits on autopilot.
- Pay down debt versus saving for retirement — it depends on how much and what kind of debt you have and what the interest rate is. There is one exception for this: if you participate in a 401k with a match, you should contribute to at least the matching level (free money!).
HOST: What about borrowing from my retirement account to pay off my debt?
KLAAS FINANCIAL: This is an idea that many people have, but not one we generally support.
- Borrowing from your 401k. No, although this may seem like a good idea at first, this is not usually in your best interest. Yes, it’s a low-cost loan. But borrowing money from your 401(k) could create even more problems should you get laid off from your employer. Typically, you have to pay loan off within 60 days of leaving your employer. If you are under age 59½, you’ll be charged an additional 10% penalty in addition to income taxes for any withdrawals from 401(k) and traditional IRA accounts. Plus, taking out large distributions from a qualified plan could push you into a higher tax bracket.
- Another idea is to work longer if you are able. If you plan to retire with debt, especially non-mortgage debt, you may put yourself in a bind. Living on a fixed income and servicing debt is a recipe for disaster. Working full-time or part-time, for as long as you can until you eliminate your debt. Once you eliminate your debt, then you can retire.
HOST: Do American’s really carry a lot of debt today? What are the primary sources for debt for people in retirement today?
KLAAS FINANCIAL: Total household debt — a category that includes mortgages, student loans, and car loans along with credit card and other debt — dipped in the wake of the Great Recession, but it has since steadily rebounded since. Overall, Americans’ debt hit a new high of $13 trillion last year, surpassing the previous record set in 2008 by $280 billion, according to the Federal Reserve Bank of New York.
Here’s how much Americans owe overall, broken down by age group: Under 35: $67,400; 35–44: $133,100; 45–54: $134,600; 55–64: $108,300; 65–74: $66,000; 75 and up: $34,500.
This is where we don’t want our listeners to be average or above average. We want them to be stellar in this area with close to zero debt!
HOST: What other tips can you offer to help people with achieving retirement security if they have debt today?
KLAAS FINANCIAL: Here are some tips we can offer.
- Stop adding to your debt balances. Remove credit cards from your wallet to reduce the temptation to use them on impulse purchases or things you can’t really afford.
- Utilize a debt reduction calculator (Bankrate.com) to figure out how to extinguish your debt quicker.
- Prioritize paying off high-interest credit card debt. Federal Reserve rate hikes can send shockwaves through stock markets and also really crush people with credit cards.
Other things to consider with interest rates on the rise:
- Credit Card Rates: The Fed’s eight rate hikes since Dec. 2015 have cost credit card users an extra $9.65 billion in interest to date and will swell by at least $1.6 billion more this year with the Fed’s recent interest rate hike.
- The average credit card interest rate for new offers is 19.05% as of the second quarter of 2018, according to WalletHub’s Credit Card Landscape Report. But existing accounts have an average interest rate of 13.08%.
- Home Loans: The Fed has cost the average homebuyer ($230,984 loan ) roughly $42,000 since the start of 2015, if you assume the 88-basis point rise in the average APR on a 30-year fixed-rate mortgage from January 2015 to June 2018.
- Today we are looking at a 30 yr mortgage rate around 4.7% or higher.
- Auto Loans: The average APR on a 48-month new car loan rose from 4.00% in November 2015 to 5.05% in May 2018.
- Pay your bills on time. Late payments will result in fees that will further increase your debt balances and hurt your credit score.
HOST: What if you don’t have an emergency fund, and you have debt?
KLAAS FINANCIAL: There are some ways you can get started with an Emergency Fund.
- Tips to work on it. While it may be difficult to save for a rainy day while paying down debt, having an emergency fund can help you avoid tapping credit cards when unexpected expenses come up, such as home or car repairs.
- Say “no”. Think twice about co-signing loans or going into debt to help adult children or grandchildren. While you may feel good about helping in the short-term, if you put yourself in a difficult financial situation, you could end up becoming a financial burden on your family members later.
The take-away from today’s show for baby boomers and everyone else listening, is that you should make retiring debt-free, and even mortgage-free a priority. This needs to be done, at the same time you are still making sure you have saved enough for retirement.
Catch C.J. Klaas and Maleeah Cuevas on Money in Motion every Thursday on Madison's 1310 WIBA from 8:05-8:35am.
