Why retiring debt-free is so important
Retirement is an awesome time to be alive. I mean, you’re putting one foot in front of the other, and walking away from a life you had no idea you wanted. You’re able to buy whatever you want, whenever you want, with cash. All the great things of life are right there: the freedom to travel without restrictions; the ability to escape your parents’ house and live your own way; the ability to save money and invest that money while still living at home.
But retirement isn’t all sunshine and flowers. It is a time when your friends may be getting paid more than you are, or when their bills are starting to mount up (and they need some help paying them off), or when they need assistance with everyday expenses like groceries or rent (and you can’t afford it). So retirement is not a time for frivolity; it’s not a time for throwing parties or building new furniture or buying limousines. It is a time for hard decisions: How much can we afford? What job will we have? Will we have enough money saved into retirement?
And before I forget about that last question: Retirement is also a time for debt-free living (a lot of people don’t realize this until after their debts pile up). Whenever possible, avoid borrowing as much as possible for retirement (unless it makes sense to use that money for something else). And finally…
If you have any questions about retiring debt free, please don’t hesitate to ask me!
Working with new clients to eliminate debt
As a professional debt collector, I have to deal with a lot of people. Not just the ones who owe money but also those who are struggling to pay their rent or mortgage, and everyone in between. There are usually three elements that define these situations: income (past due on debts); asset (assets that don’t produce income); and debt (past due on debts).
Many people think these three elements are independent; they aren’t. Income is based off past events, asset is based off assets, and debt is dependent on income. Both income and asset can be modified for the future, as long as past events are fixed to the present.
What you should realize is that all three factors contribute to your ability to pay your debts back. If you can eliminate all three of them (doable if you have enough income), then you will be able to pay off your debts faster than previously possible and retire sooner than anticipated.
To do this, it helps to have an idea about the amount of time you need for each factor:
Income: The amount of time needed for each debt depends on: how much money you make each month; how long it takes to save up enough money for one month’s rent or mortgage payment; how much debt there is relative to assets; and how much of your monthly expenses are tied up in interest payments relative to any savings or investment returns.
Asset: The amount of time needed for each debt depends on: what type of assets you own relative to the size of liabilities; what type of money management you use relative to the total amount owed. Most people use a mix which makes sense given their circumstances but doesn’t work with everything else in mind. You should also consider depreciation over time because most assets will depreciate over time unless they’re replaced every year or so — which is neither practical nor desirable if paying down debt is your goal!
Debt: The amount of time needed for each debt depends on: whether there’s any outstanding balance against it; how bad things have gotten before today; and what interest rates are on any new loans used today because today’s rate might not be appropriate in years ahead!
Shoring up emergency reserves
Shoring up emergency reserves can be a time-consuming task, but it is definitely worth the time.
I first learned of this tip from a friend who was working in the insurance industry, and I recall she used to tell me about it constantly – saying that you should always have some money in an emergency fund. I never fully understood what she meant by this. But then, years later when my own company offered online retirement products and I started to use them myself, I quickly discovered why this advice was so important: You can never afford to be without any money. Even if you have $1 in your savings account at the end of each day (or even $10), you should never be without any money when you need it. To put it bluntly: If something happens and you need cash fast, your only choice is to go into debt (or bury yourself in credit card debt). And that’s just for emergencies! If something happens and you need cash fast – or even if something doesn’t happen at all – then there are several other options available to you:
You can go into debt (or credit card debt).
You can live paycheck-to-paycheck until either your social security benefits kick in or your employer makes payroll deductions on your behalf (which can take weeks).
You can live off savings until retirement age, which is almost guaranteed to happen sooner or later anyway (and with low interest rates, it’s quite likely sooner).
You can get into investments and make money while living off life insurance policies until retirement age without ever going into debt or credit card debt. While this option is less than ideal for everyone, especially for those whose careers require them to make frequent moves around different parts of the country (like my friend does), investing is certainly an option worth exploring if you are financially stable enough to do so. Shoring up emergency reserves will make sure that neither of these options will ever come up. We hope this helps someone else prepare for retirement!
Verifying that the client is saving enough for retirement
Many people don’t realize that the amount of funds they need to retire is far higher than the amount of money they actually have. It’s a very common mistake to assume that only a small portion of your income will be needed for retirement. The reality is that you need to have enough in savings and/or an emergency fund to cover your basic expenses in retirement, including health insurance and long-term care insurance.
I recently spoke at a conference about this topic with my friend, who works at one of the largest financial advisors in the country. He said that more and more clients are discovering that they can retire debt free and wealthy once they have retired! If you look at his data, he says many clients who go into debt while working do so because they don’t save enough or because their actual savings is too low. He also mentioned that many individuals choose not to work because they want to enjoy their retirement years without working for others.
The bottom line is this: how much does your client need for retirement? How much does he or she currently have saved? How much money can he or she retire with? Hopefully, today’s post will help answer those questions!
Planning for a retirement lifestyle
I’d like to share with you the biggest mistake I make when helping clients prepare for their retirement. It’s an easy one to make and it’s a mistake that could cost you dearly in the long run.
People often say they want to retire but never do. They wander around saying they want to retire, but never do. They do not have a defined plan, or they have a plan, but it doesn’t take into account their lifestyle changes (such as changing jobs, or moving from one house to another), so their plan is incomplete and risky: if something happens to them before they retire, it will be too late for them.
It is common for people to tell me that they don’t want to retire because of money worries; that is not the case! Retirement is about freedom from having to work. It is about having enough money in your pocket at the end of the day, so you can afford what you need; living comfortably and enjoying life without worrying about money or taxes.
Here are some things you should think about:
• What will your lifestyle be like when you retire? What kind of furniture/housing/vehicle will you need? Where will you live? How much time will be available for leisure/travel/sports activities? What kind of appliances/household expenses do you need? Will there be any major medical bills during retirement age? Which services (health care, social services) are necessary during retirement age?
• If your health deteriorates before retirement age due to illness (or injury), what will happen then? If something happens during retirement age such as a car accident or other accident, will friends and family visit your home after your death… or not? If something happens while tax free (like if someone steals a car while driving on your property), how much would be owed after taxes… how long would this take before it was paid off? How much would it cost to replace these items (which are unlikely to ever be found)? How long would it take until the rest of your debts were paid off (and total debt paid off)? Would there be any additional costs associated with having a home while in this position versus another position where this wouldn’t happen (like renting)? Would there be any financial difficulties if emergency funds didn’t cover all major expenses for three months during retirement age (i..e., if income suddenly dropped drastically)? Would there be
The importance of retiring debt-free
The final piece that should be addressed is, of course, the importance of retiring debt-free.
There are many reasons why you may want to retire debt-free; but they should all contribute to your retirement goals.
In fact, retirement is a goal that can be achieved with only a small amount of accumulated debt (so long as you’re saving enough), so it’s important that you prioritize what you want more than anything else. The amount of debt will encumber your savings and limit your ability to invest in other assets and create wealth.
Once you get yourself into this mindset, the last thing you need is any additional stress; and if there isn’t enough money in the bank or in your emergency fund to retire debt-free, then it becomes a source of financial stress. The consequences are very real and people who can’t afford to retire debt-free have a much higher risk of financial distress when they eventually do so.