Debt in retirement is becoming an increasingly more important concern for workers and retirees, according to a new study on retirement confidence, with more than one-third of retirees saying their debt level is a major or minor problem.
The good news is that more than one out of every five retirees (22%) developing a strategy for reducing debt is one of their top 3 longer-term financial planning priorities.
And the current downturn in stocks and bonds might give them just the opportunity they need.
For assistance tackling debt as you near retirement or enter post-work life, consider working with a financial advisor.
Why Retirees Should Invest in Paying Down Debt
According to the 2022 Retirement Confidence Survey from the Employee Benefit Research Institute, worries about debt also are a major factor for both workers and retirees who report that they feel “not confident” as a result of the Covid-19 pandemic and its economic damage. Of the one-third of workers who said they were not confident, 54% said their debt was a major problem. Nearly one-quarter of current retirees said they’re not confident, with 61% of them calling their debt total a major problem.
Recent data from the U.S. Federal Reserve finds that credit card debt increased to a record total of $1.1 trillion during the first quarter of 2022, an increase of 19% from the first quarter of 2021. The highest average balance of $8,080 was held by seniors 75 years old and older, with people between the ages of 65 and 74 carrying an average of $7,030 in card debt. Pre-retirees between the ages of 55 and 64 held average card balances of $6,880, according to a report from CreditSummit.com.
The report concluded: “Debt among senior citizens is becoming a serious threat, with half of the country at risk of saving too little for retirement.”
This surge in debt comes at a time when investments in both stocks and bonds are down. For the first three quarters of the year, the Standard and Poor’s 500 index has declined by more than 20%, plunging stocks into an official bear market that could continue to go lower.
One short-term guaranteed return investors can find would be paying down their card balances. Every extra dollar beyond the minimum monthly payment gives you a return that’s equal to your card’s interest rate. With some cards charging interest rates of 29% or more, that kind of return beats annual stock gains in all but 35 of the last 40 years.
Here’s an example of how it works for someone with a card balance of $5,000 at an interest rate of 16.65%:
Paying the minimum
- Monthly payment: $99.84
- Time to pay off: 86 months
- Total interest paid: $3,587
- Total amount paid: $8,587
Investing more in payments
- Monthly payment: $246.33
- Time to pay off: 24 months
- Total interest paid: $912
- Total amount paid: $5,912
- Additional monthly payment: $146.49
- Total additional amount paid/invested: $3,515.76
- Interest saved (total return): $2,675
- Time period: 24 months
- Annualized return: 32.7%
By paying an extra $3,515.76 over 24 months you’ve reduced your loan balance by that same amount, as well as saving $2,675 on interest – a total return of $6,191 in value two years, giving you an annualized yield of more than 32%.
In addition, now that you’re free and clear you’ve can take the extra amount you were paying on your card debt, combine it with the original $99.84 you were paying and put that $246.33 each month into long-term stock investments.
The Bottom Line
As it becomes increasingly difficult to read market and yield robust returns, seniors can help secure their retirement by paying down debt.
Retirement Planning Tips
- The 4% Rule is perhaps the most well-known rule of thumb when it comes to retirement planning. The strategy dictates that a retiree can withdraw 4% of their savings in the first year of retirement (adjusting subsequent withdrawals for inflation) and have enough money to last 30 years. However, researchers recently found the 4% Rule may be outdated. New research suggests that retirees following a fixed withdrawal strategy should only take out 3.3% of their savings in the first year.
- A financial advisor can help you plan for retirement and devise a withdrawal strategy that meets your needs. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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