With unprecedented debt levels at older ages, Americans are struggling to get it all done before retirement. Experts commonly recommend having a million or more in savings. Debt levels are at all-time highs, and those in their 50’s are still adding debt instead of paying off mortgages.
As you get serious about retirement you may wonder which option will offer the highest payoff:
Pay off all your debt and enter retirement with little or no savings, or save as much as possible and enter retirement with heavy debt loads?
The Debt Picture
The Employee Benefits Research Institute found that those over 75 were still carrying an average of $27,409 in debt, often from an existing mortgage. Those between 55 and 64 owed the most of any age group averaging $107,060 in debt balances. Comfort with loans and adding debt later in life are both factors in the rising debt numbers among older Americans. Those who retire with debt spend savings faster and need more in savings to get by. Increasing health care costs and higher than expected living expenses can lead to financial disaster after your work life ends, impacting your long-term quality of life.
The Retirement Savings Picture
Savings statistics are just as dismal. The average 401K balance was only a little over $96,000 in 2015. According to the Government Accountability Office, 29% of those over 55 have no savings and no pension plan to rely on in retirement. The average balance on accounts for those 55 to 64 is only $104,000, and those between 65 and 74 only increased average balances to $148,000. These accumulated funds translate to less than $10,000 per year ($833 a month) in retirement, assuming average growth and withdrawal rates. Converting balances into a life annuity would only bring approximately $310 a month for those with around $100,000 and an estimated $650 a month for those with around $150,000 in savings. Even adding social security payments to these numbers does not provide replacement income for retirees. Living off $2,500 to $3,000 a month does not go very far if you still must pay a mortgage and other debt payments.
With the dim reality on both sides of the equation, many consumers wonder whether it is better to pay off existing debt or put additional money towards funding retirement.
How to Decide
What is your rate?
With debt, you must consider the interest rate you are paying to maintain the debt. The higher the rate, the harder it is to pay off and the more you pay each month towards interest instead of debt reduction.
With investments, you must consider the rate of return. If you are receiving a return below inflation, you might reconsider your investment choices funnel additional money towards eliminating high-interest debt payments instead.
What is The Cost?
Debt negotiation can lower what you owe by 50% or more and lead to paying down debt much faster than paying the full balance at double-digit interest rates. The discounted cost can lead to faster debt reduction, leaving you with more time to save when you eliminate the debt.
Investments may have high accoess costs when you remove funds ahead of retirement. Tapping into a 401K or IRA could result in taxes and penalties, requiring you to cash in more to pay down debt with these funds. It also erodes existing balances, which can be difficult to replace.
On the other hand, adding to a 401K and receiving a company match can increase balances exponentially without additional out of pocket costs. Pretax dollars ando tax-freegrowth, increasee the balance faster, leading to more money available in retirement.
Advantages of Debt Reduction
Reducing high-interest rates is a more efficient use of money when investment returns are lower than interest charges. Paying off all double-digit debt before retirement will leave you with more in your pocket each month once you retire. You will not need as much to live on and will be able to preserve savings longer.
As you reduce the debt you are living below your means. When debt is under control, adding that same monthly payment to retirement accounts will build them faster and lead to greater financial security. Returning to higher spending levels after debt reduction can result in increasing debt balances and continued financial struggles.
When you set specific goals for yourself, track progress, and push yourself to meet imposed deadlines, you will find faster success. Just adding a little each month can lead to discouragement because you won’t see fast progress.
Advantages of Increasing Retirement Savings
Building retirement savings leads to greater financial security. You have an emergency fund and money in the bank, giving you the confidence you can retire comfortably. Set a long-term goal and add money to the account each month for maximum benefits. Put in at least enough to receive the maximum company match and increase contribution amounts at least once a year.
When you have debt, interest works against you. When you have savings, interest, and gains, work for you. The compounding effect over many years or even decades can double or triple your contribution amounts, growing money faster.
Tax benefits also lead to faster growth. Contributing money before taxes and growing money tax-free allows 100% of your funds to increase the account balance. Debt payments made with after-tax dollars have no tax benefits at all.
The higher your retirement account balances, the more would be able to manage a few debt payments even after your work life ends.
Finding the Balance
Most find it is not wise to only pay off debt, because it may take 30 years to eliminate all debt, leaving you with no retirement savings. On the other hand, if you spend all your effort to grow investments while carrying high-interest debt, you lose valuable money in interest payments, which could work harder in investments.
To start,o capitalize on the opportunity. Add to your 401K retirement balances with tax-free money and tax-free growth. Take advantage of the company match for free money to grow balances faster.
Then benefit from faster debt reduction through debt negotiation and eliminate all double-digit debt. If you cannot pay the mortgage off before retirement, consider downsizing to reduce or eliminate housing payments in retirement.
Live within your means. The less you live ono now, the less you need in retirement funds to maintain your lifestyle. Consider your priorities and funnel any additional money to the top financial stress that keeps you up at night.
If you are burdened with high amounts of credit card debt and are struggling to make your payments, or you’re just not seeing your balances go down, call Timberline Financial today for a FREE financial analysis. Our team of highly skilled professionals will evaluate your current situation to see if you may qualify for one of our debt relief programs. You don’t have to struggle with high interest credit card debt any longer. Call (855) 250-8329 or get in touch with us by sending a message through our website.