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3: Analyze Your Decisions

Review Your Spending and Borrowing Habits

wallet surrounded by credit cards and cash

Spending happens, and sometimes when you least expect it. But before you go into retirement or even during retirement, get a handle on some habits you have for spending and borrowing. That way, you can avoid indiscriminate spending or borrowing that impacts your retirement decisions.

  • Spend less than you earn. This not only lets you save during your working years, but is also a good rule to follow in retirement.
  • Track your spending and plug any spending leaks. Use SAMs Spending Detective Worksheet to help you identify areas where you might be “leaking” money that could otherwise be saved. Even small cutbacks in expenses can add up to significant savings over time.
  • Spend less than 30 percent of your credit limit from any source.
  • Build your emergency fund keeping at least three months of living expenses available.
  • Pay your bills on time, all the time. Methodically pay down high-interest debt balances if you cannot pay off the entire bill.

Approximately 80 percent of Americans carry some form of debt today. So if you are nearing retirement or are retired with debt, you’re probably not alone. Your challenge is to handle that debt wisely.

Reduce Your Debt Prior to Retirement

Prior to retirement, you should view yourself in a debt reduction mode. In fact, consider the 10 years before retirement as a “debt reduction decade.” Intentionally eliminate your overall debt by redirecting your spending and increasing your debt repayments.

  • If possible, pay off your mortgage by retirement. Your mortgage is likely your biggest monthly expenditure. Make extra monthly payments toward the principal balance to reduce your mortgage interest and gain more equity. However, if you have other high-interest debt, you may want to address that first before paying down your mortgage.
  • Suspend or reduce your retirement contributions. Yes, this is in direct contrast to most of what you’ve read. But if your debt costs more than what you earn on your investments, it makes sense to redirect some or all money available to you to pay off loans.
  • Don’t take on additional debt. Get in the habit of paying immediately for the things you want or need. It’s hard to resist the urge to buy, especially with cheap credit available. Try to think long-term, though, and ask yourself if the debt you incur now will hamper your retirement lifestyle or dreams.

Additionally, you may want to take on a part-time job or consider working to full retirement age (FRA) to have more income for addressing your debt obligations.

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Tally Your Debt Load

What is your current debt load and what do you expect it to be as you enter retirement? Many financial advisors suggest that your total consumer debt load (not including housing debt) should be less than 20 percent of your net income.

  1. Divide your monthly consumer debt payments by your monthly income (after-tax).
  2. Move the decimal point two places to the right to get your percentage of consumer debt load. (For example, if you pay $500 monthly for consumer debt and you have $2,500 in income (after taxes), your consumer debt load is .20 or 20 percent.)
  3. Are you in line with the 20 percent guideline? Do you think this will change as you enter retirement?

What if You Have Debt in Retirement?

Having debt is becoming more common for retirees. If you find yourself in a situation in which you must go into debt prior to or during retirement, use the following guidelines to manage your obligations:

  • If you have to use credit, be sure to read the fine print concerning fee assessments and timing.
  • Use a home equity loan to pay off debt. (You may also be able to deduct interest on your loan, but you are putting your home at risk if you do not make your monthly payments.)
  • Refinance your mortgage, downsize or move to a rental property.
  • Consider a reverse mortgage, but talk to a qualified financial planner before proceeding.

Co-signing Loans for Family Members

If you’ve flown recently, you’ve likely heard airline attendants advise you during the preflight safety instructions to “put your own oxygen mask on first” before helping others … even children. Well, the same holds true when it comes to helping out others financially. When it comes to your retirement plans, take caution before taking on debt or co-signing loans for others, even family members.

If you are co-signing a loan, you take on legal responsibility for the debt.

  • A missed payment by the primary borrower can negatively affect your credit, keeping you from borrowing at a future date.
  • If the borrower defaults, you agree to pay the full debt and any fees associated with it – even legal fees incurred to collect the debt. Co-signing doesn’t mean you only owe half of the debt.
  • Debts that are co-signed cannot be eliminated. You can’t remove yourself from the loan a few months later.
  • Your Social Security payments can be garnished to repay the loan, interrupting your retirement income stream.

Ultimately, co-signing is a personal decision, and it may make sense for you despite the financial risks. Guilt and loyalty can play on your decision to lend a hand, but remember that it’s your credit on the line. If you’ve spent years building your retirement nest egg, don’t let someone else’s financial blunders crack it.

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