Last Week’s Question of the Week: What is the average length of retirement in the United States, 18 or 30 years?
ANSWER: The average is 18 years.
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 people 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 the match at the very least (free money!)
Borrowing from retirement accounts: Sometimes people think that is might be Ok to borrow from their retirement accounts to pay off my debt. While 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 taxesfor 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.
Working longer than you planned to: 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: And how much debt do Americans in general carry today? And what kind and how much debt do people headed towards retirement have today?
KLAAS FINANCIAL: Total household debt includes mortgages, student loans, and car loans along with credit cards etc. . This debt continues to spike upwards according to the Center for Microeconomic Data latest Quarterly Report on Household Debt and Credit: total household debt increased by $192 billion (1.4 percent) to $13.86 trillion in the second quarter of 2019.
When looking at various age groups, the amount of debt that Americans carry who are ages 55–64 is more than $100,000, (actually number, $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!
Some suggestions to help you stray AWAY from DEBT:
- STOP! 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: 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.
- Pay: Pay your bills on time. Late payments will result in fees that will further increase your debt balances and hurt your credit score.
- Understand current Interest rates and how they affect your debt.
HOST: When looking at the different types of debt we may have, what should we be seeing in terms of interest rates for those debts?
KLAAS FINANCIAL: Great question.
Credit Cards: According to the Federal Reserve’s data for the first quarter of 2019, the average APR across all credit card accounts was 15.09% — the highest rate recorded since 1994. The average credit card interest rate is 19.24% for new offers and 14.14% for existing accounts, according to WalletHub’s Credit Card Landscape Report in January of 2019. This is why we want you to pay down or off this type of debt first if possible.
Home Loans: As of October 23, 2019, the average home rate for a home loan in the United States was 3.99% for a 30 year loan, and 3.54% for a 15 year fixed. One year ago this was sitting at 4.7% for a 30 year. Consider a refinance if you have mortgage and are sitting near 5% or higher.
Auto Loans: The national average for US auto loan interest rates is 4.21% on 60 month loans. For individual consumers, however, rates vary based on credit score, term length of the loan, age of the car being financed etc.
The typical term length for many auto loans is now 68 months, with loans of 72 and 84 months becoming increasingly common. The higher APRs of longer term auto loans, however, can result in excessive interest costs that leave borrowers ‘upside down’—that is, owing more on the auto loan than the car actually costs.
Student Loans: Student loan refinancing saves borrowers money by replacing existing education debt with a new, lower-cost loan through a private lender. To qualify, you’ll need: Credit scores at least in the high 600s – ideally higher, steady income, potentially a co -signer who qualifies.
You can refinance both federal loans and private loans and it doesn’t cost anything to refinance student loans, and you may be able to reduce your monthly payment or pay off your debt faster. According to Nerdwallet.com, current rates from companies like ELFI (Educational Loan Finance) and SOFI currently offer rates between 3.14% and 7.94%.
The take-away from today’s show, 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.
HOST: Now a question in our Money in Motion Listener Question Corner, one of your listeners Tom asks,
“I’m about to retire. Is it a good idea to put all of my savings into safe investments like bonds?”
KLAAS FINANCIAL:. Tom, the short answer is no. Although you should definitely reduce your stock allocation in retirement, it’s not a wise move to get out of stocks altogether.
The reason is inflation. Let’s say you have a $1 million nest egg and that you can get $50,000 in annual income by investing all of it in bonds. That’s great for the time being, but the problem is that $50,000 in say, 20 years, will not have the same purchasing power that it does today.
Stock investments can generate income and can also allow you to grow your income stream over time, helping you keep pace with inflation.
When selecting stock investments, it’s important to realize that your priorities shift in retirement. Specifically, instead of growing your future income source, your priorities become more about preserving your wealth, generating income and avoiding excessive volatility.
Catch C.J. Klaas and Maleeah Cuevas on Money in Motion every Thursday on Madison's 1310 WIBA from 8:05-8:35am.