When we think about retirement planning, many people focus more on money coming IN, rather than money going OUT. We’ve talked quite a bit about how minimizing taxes in retirement is a crucial strategy for maximizing your income, but there’s another factor that is increasingly limiting the retireability of many Americans: debt.
A recent study conducted by LendingTree found that a staggering 97% of retirement-aged adults have non-mortgage-related debt. Where is all of this debt coming from? Of those surveyed
- 93% have credit card debt
- 37% have debt through a vehicle loan
- 19% have taken out personal loans
- 8% are still repaying student loans, often for a child or grandchild
When you combine inflation, high interest rates, and the fixed income that comes with being retired, it’s no surprise that debt is up, and paying it off is slow going. But if we want to create a stress-free retirement, we need to take a look at what we can do to head into retirement debt-free, and examine better debt-management strategies for retirees.
Reduce Debt Dependence With Reliable Retirement Income
There’s a pretty big difference between retirement savings and retirement income, especially monthly income. If you have a nice-sized pension or traditional 401(k), yes, you have savings, but you also have a few challenges. Firstly, withdrawing what you need is going to trigger taxes, which means you’ll need to withdraw enough to pay yourself and the government. And secondly, the value of your savings is tied to the market. $8000 in savings today might be worth less when you need it. Together, this means it can be incredibly stressful to determine how much you can safely withdraw in January while still having enough in December. What happens if taxes increase, the market tanks, and you have a financial emergency all in the same year? No wonder so many retirees are in debt.
Now, let’s say instead that you funneled some of your savings into Modern Annuities® rather than traditional retirement savings vehicles. You have a steady monthly “paycheck” in retirement that is insulated from market downturns, while still benefiting from a bull market. Not only is it predictable, it’s also tax-free. This makes it far easier to budget, not to mention that if taxes increase, you don’t have to rob Peter to pay Paul (as you would if you were pulling more from taxable retirement savings just to maintain your after-tax amount). And if you’re worried about tying up your principle, you can even add a liquidity rider to your annuity for increased access to funds.
Build a Safety Net for Emergencies
Inflation is one of tne of the most significant factors driving debt for retirees. Everything costs more these days, and even though Social Security benefits adjust annually based on cost of living, reports show that recipients have 20% less buying power than they had 15 years ago.
While you can’t do anything about inflation, you can tackle one of the biggest expenses impacted by inflation: healthcare. If you have access to an HSA, using it to save for healthcare expenses in retirement is a great way to build a tax-advantaged emergency fund. You’ll have tax-deductible contributions, tax-deferred growth, and tax-free withdrawals for qualified expenses. Another strategy we frequently recommend is a Modern Life Insurance™ policy with a long-term care rider. Assisted living and in-home care costs can add up quickly, but this strategy allows you to have coverage if you need it and flexibility if you don’t.
Take Advantage of Low-Interest Loans
Another reason why we love Modern Life Insurance™ options for retirees is the options for access to funds. If you have the right kind of life insurance product, say, whole life insurance, and if you properly fund your policy, you can borrow against the cash balance of your plan. This is a tax-free event. You certainly can’t borrow against your IRA, and if you increase your withdrawals to cover an emergency, you’ll owe more in taxes. Borrowing from the right kind of life insurance policy is also far cheaper than a traditional loan or credit card interest rates. Typically, you’ll pay 4-8% for a policy loan, whereas traditional loans have interest rates averaging around 12% and credit card interest rates average a staggering 22%!
With Modern Life Insurance™ options, you have much more affordable lending options should the need arise. It also makes debt management much easier, since you can borrow from your policy to repay high-interest loans. And if you don’t repay the loan, the outstanding balance and interest will simply be deducted from the death benefit left to your loved ones.
De-Stressing Your Retirement One Strategy at a Time
While debt contributes to anxiety for anyone who’s struggling to pay it off, the stakes are significantly higher for retirees who are desperately trying to make sure their savings last. We want your retirement years to be your best years yet, which is why Parady Financial Group is dedicated to helping people like you save and manage your money smarter. If you’re ready to learn more about the unique strategies we help retirees and pre-retirees implement, join one of our next events and start building the future you deserve!
