Last Week’s Question of the Week: What is the earliest age you can draw Social Security for normal retirement?
ANSWER: Age 62.
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 follows them into retirement, and it can put an undue burden on retirees that while they are trying to keep up with regular living and medical expenses. This is 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 to REDUCE and then ELIMINATE YOUR DEBT: If you don’t listen to us, then please 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 vs. 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; if you participate in a 401k with a match, you should contribute to the match at the very least — free money! However, in order to pay down debt, we generally don’t recommend borrowing from retirement account though to do this. 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 the loan off within 60 days of leaving your employer and if you are under the age of 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 higher tax brackets.
- PLAN TO WORK LONGER: 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 retirement in general carry today?
KLAAS FINANCIAL: Remember that total household debt includes mortgages, student loans, and car loans along with credit cards etc. According to Experian’s 2019 Consumer Debt Study, total consumer debt in the U.S. is at $14.1 trillion, with Americans carrying an average personal debt of $90,460.
A February 2020 LendingTree study found that seniors in the 65-70 age group carry $22,471 in non-mortgage debt. On average, Americans held a slightly higher percentage of credit card debt (35.4%) than auto loan debt (34.8%), although it’s pretty much a wash. This does show that for many retirement-age seniors, credit cards are just as much a burden as auto loans.
Another survey back in 2018by American Financing, a national mortgage banker, found 44 percent of retirees (age 60-70) do have a mortgage when they retire. Our desire is for our listeners and clients to be close to zero debt!
Here are 4 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.
- Understand current interest rates and how they affect your debt. Prioritize: Prioritize by paying off high-interest credit card debt first.
- Utilize a debt reduction calculator (Bankrate.com) to figure out how to extinguish your debt quicker.
- Pay bills on time. Late payments will result in fees that will further increase your debt balances and hurt your credit score.
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: This is a great question. Here are some things to look for:
- Credit Cards: According to BankRate.com, the average credit card interest rate is currently sitting at 16.89%. Therefore, we want you to pay down or off this type of debt FIRST if possible.
- Home Loans: Ideally as we approach retirement, we would prefer that you have no mortgage. As of March 25, 2020, the average home rate for a home loan in the United States was 3.75% for a 30-year loan, and 3.06% for a 15-year fixed. Consider a refinance if you have mortgage and are sitting near 5% or higher. There is no guarantee as to what mortgage rates will do in the future, so do your research first.
- Auto Loans: As of March 25th, the national average for US auto loan interest rates is 4.42% 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 is currently valued at.
- 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. Refinancing student loans from companies like ELFI (Educational Loan Finance) and SOFI currently offer rates between 2.39-5.39%, again depending on credit etc.
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 Pat asks, “I am lucky to have a Health Savings Account through my employer, and have a significant amount saved into it. What happens to my HSA if I don’t use it?”
KLAAS FINANCIAL: Thanks Pat, we hear this one a lot and it’s a great question. If you withdraw HSA funds and don’t use them to pay for qualified medical expenses, you’ll pay income tax and a penalty of 20%. Unlike an FSA, there’s no “use it or lose it” provision. If you have an HSA through an employer, the money in the account is yours – and you can take the balance when you leave your job.
But our bet would be that once you are retired you will continue to have medical expenses because as you may have heard, medicare does not cover everything. I would encourage you and our listeners to max out your HSA contributions when you can. The 2020 limits for health savings accounts (HSA) for 2020 are $3,550 and $7,100, respectively. The catch-up contribution limit for those over age 55 is at $1,000.
Catch C.J. Klaas and Maleeah Cuevas on Money in Motion every Thursday on Madison's 1310 WIBA from 8:05-8:35am.