How Can Baby Boomers Tackle Their Housing Debt Faster?

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Unlike people of her father’s generation, Lauren Beale, 60, said she never expected to own a house outright at retirement. 

Beale, a former journalist who retired in 2015, pays $2,063 a month for a mortgage for her home in Palos Verdes Estates, Calif., in Los Angeles County, where she lives with her husband. The couple bought the house for $800,000 in 2002.  

They now owe $268,000 on the mortgage. And Beale said she had no plans to double up on her payment and pay it off faster. “What if you need that money for some kind of emergency down the road?” she asked. “We are comfortable with some mortgage payment. It doesn’t make sense to draw from the nest egg, the retirement accounts, to pay it down soon.” 

Beale, now a freelancer and novelist, said she would rather keep her savings as a safety net: “I think boomers are feeling less secure about our medical futures.” 

Retired with a mortgage 

The Federal National Mortgage Association, known as Fannie Mae, recently released an analysis concluding that baby boomers — those born between 1946 and 1965 — were 10 percentage points less likely to own their homes outright than pre-boomer people who were the same age in 2000.  

The report says the rise in housing debt among older homeowners is increasingly worrisome. There are concerns that having mortgage obligations could weaken seniors’ financial security in retirement and put them at greater risk for foreclosure, among other potential problems. 

Still, Beale is not concerned. Her family’s monthly mortgage bill is just roughly 20 percent of the total household income. They have no other debts, nor do they have major monetary needs. Her financial goal at this stage is to have enough money to live comfortably in retirement, pay all the bills and be able to travel. 

To be sure, not every boomer is as financially confident as Beale. Nationwide, boomers carried an average housing debt of about $68,400 in 2016, according to Federal Reserve data analyzed by MagnifyMoney. National statistics also revealed that a hefty 2.5 million people ages 55 and older became renters between 2009 and 2015, up 28 percent from 2009, the biggest jump among all age groups. RENTCafe.com, a nationwide apartment search website, said the notable change in renter profile could be that empty-nesters changed lifestyles, got hit hard by the housing slump or can’t afford to own homes. 

How to pay off your mortgage faster 

For those who do care about paying mortgages off before retirement, here are some ways to handle those debts faster and stay motivated to reach your goals: 

Paying off debt? It’s like earning more money 

Leon LaBrecque, a Michigan-based certified financial planner, said roughly half of his clients — mostly middle-class Americans — are able to pay off mortgages approaching retirement. A boomer himself, he is all for paying off mortgages as soon as possible to achieve  better cash flow. 

“Debts are an anti-asset,” said LaBrecque. “Removing an anti-asset is the same as having an asset. So If I got a 4 percent mortgage, I pay it off, I made 4 percent.” 

He added: “It’s very hard to make 4 percent now. The fixed-income market is so constrained that there are not a lot of good alternatives to debt reduction.” 

Pay off other debts. High-interest debt, in particular. 

Before paying down a mortgage or paying it off, get rid of other high-interest-rate debts first. Think student loans and credit card balances.  

LaBrecque offered this example:  Say you have a 4 percent rate on your mortgage and an auto loan with a $350 payment and a 5 percent interest rate — you should pay the car note off first. Then you can put an extra $350 toward your mortgage each month. 

Find money from other sources 

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If you have cash idling somewhere, with no particular purpose, pay off your mortgage. Remember: If you go and pay off a loan, there is an immediate return for what you’ve repaid. 

“You got $125,000 sitting in the bank, making nothing, and you owe $80,000 on the mortgage; pay the mortgage off,” LaBrecque has been telling his elderly clients lately. 

Also, if you have money in the market, consider getting rid of a sub-performing investment and put the resources into the mortgage, he said. 

Improve the cash flow 

Be conscious of how you spend your money. If paying off housing debts is your primary goal, prioritize it and allocate your money accordingly.  

“We always talk about having a good cash-flow management system for our younger population, but we don’t get a lot of that on the older population,” said Juan Guevara, a Colorado-based certified financial planner. “We always think that, ‘Well, those guys have figured it out.’ Well, maybe not.” 

Take a look at your cash flow holistically. When you track your spending, you can watch for opportunities to put more money toward your mortgage. For example, if you were helping your children pay student loans, see if they can take on the responsibility and redirect that budget toward your housing debt. As you approach retirement, consider using any bonuses or pay raises you receive to pay down debt.  

Break down big goals. Baby steps. 

It’s easier to make big goals and separate them into little pieces, experts say. Guevara advises that boomers divide their monthly house payment by 12 and add that amount to their payment each month.  

If your monthly payment is $1,500, for instance, “now you’re looking at a goal of having to add another $125 to each payment every month, instead of having to come up with $1,500 at the end of the year,” Guevara said. 

Refinance your mortgage 

Once you’ve managed a good cash flow, it’s likely that you are able to apply extra funds to your mortgage every month. This is when you may to consider refinancing the mortgage to get a lower rate or a shorter term. 

LaBrecque said he suggests that clients take out 30-year mortgages but pay them off sooner.  

“You can always turn a 30-year mortgage into a 15 but you can’t turn a 15-year mortgage into a 30,” he said. “I’m a big fan of having the obligation as low as possible on a monthly but also have the flexibility to pay it off.” 

Shorter home loans generally have lower interest rates, so you’ll not only pay off your mortgage faster, you’ll also pay less in interest.  

Beale has refinanced her mortgage twice to lower the monthly payment. Her current 20-year mortgage now carries an interest rate of about of 3.88 percent, significantly lower than the original 30-year loan. (It came with a rate above 5 percent.) 

You can learn more about this tactic in our guide to refinancing your mortgage. 

Educate your children  

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Guevara said he has seen an increasing number of parents spending beyond their means for their children: They’re taking on student loans, supporting sons and daughters after they finish school or offering other assistance. Those expenses chew up a significant amount of the money they could be putting toward the mortgage.  

“It’s not my place to tell them to stop,” he said. “It’s my place to show them, ‘Look, this is what happens if you don’t stop or if you continue on the path that you are on now.’” 

If you want to own your house outright earlier, Guevara said it’s worth starting to teach your children about the value of money and helping them become more financially responsible in an early stage. 

“Money is a taboo in our society, and it shouldn’t be,” Guevara said. “It should be something that we talk about at the dinner table.” 

Look forward to financial freedom

Beale and her husband will be debt-free in 13 more years if they stay in the same house and continue making payments as they’ve been doing. But she doesn’t seem to look forward to that day. 

“I think as we age, things that might seem like a happy occasion might be more of a sense of finality,” she said. 

But she also finds a silver lining — the financial freedom that comes when debt is paid off. 

“Who knows at that point; what if I have grandkids?” she said. “Maybe I’ll say: ‘Hey, my bills are paid. Maybe I’ll start taking that $2,000 and putting it into a college fund or something.’” 

The post How Can Baby Boomers Tackle Their Housing Debt Faster? appeared first on MagnifyMoney.

Where the Wealthiest Millennials Stash Their Money

There’s been much talk about millennials being fearful of the stock market. They did, after all, live through the financial crisis, and many are shouldering record levels of student loan debt, while grappling with rising fixed costs.

The truth is that historically, young people have always shied away from investing. A whopping 89% of 25- to 35 year-old heads of household surveyed by the Federal Reserve in 2016 said their families were not invested in stocks. That’s only two percentage points higher than the average response since the Fed began the survey in 1989.

MagnifyMoney analyzed data from the 2016 Survey of Consumer Finances, conducted by the the Federal Reserve, to determine exactly how older millennials — those aged 25 to 35 — are allocating their assets.

In 2016, wealthy millennial households, on average, owned assets totaling more than $1.5 million. That is nearly nine times the assets of the average family in the same age group — $176,400. Included were financial assets (cash, retirement accounts, stocks, bonds, checking and savings deposits), as well as nonfinancial ones (real estate, businesses and cars).

While the wealth of each group was spread across just about every type of asset, the biggest difference was in the proportions for each category.

To add an extra layer of insight, we compared the savings habits of the average millennial household to millennial households in the top 25% of net worth. We also took a look at how the average young adult manages his or her assets to see how they differ in their approach.

Millennials and the stock market

Despite significant differences in income, we found that both sets of older millennial households today (average earners and the top 25% of earners) are investing roughly the same share of their financial assets in the market – about 60%.

Among the top 25% of millennial households, those with brokerage accounts hold more than 37% of their liquid assets, or about $224,000, in stocks and bonds and an additional 26%, or $154,000, in retirement accounts. Meanwhile, just over 14% of their assets are in liquid savings or checking accounts.

By comparison, the average millennial household with a brokerage account invests a little over $10,000 in stocks and bonds, or 22% of their total assets, and they reserve about 21% of their assets in checking or savings accounts.

Millennial households invest most heavily in their retirement accounts, accounting for around 38% of their financial assets, although they have only saved $18,800 on average.

Wealthy millennials carry much less of their wealth in checking and savings, compared with their peers. Although wealthier families carry eight times more in savings and checking than the average family — $84,000 vs. $10,300 — that’s just roughly 14% of their total assets in cash, while for the ordinary young family that figure is around 20%

The Fed data show that those on the top of the earnings pyramid are able to save far more for the future, even though they’re at a relatively early stage of their careers.

Across the board, older millennial families hold the greatest share of their financial assets in their retirement accounts. Although that share of retirement savings is smaller for wealthier millennial families (26% of their financial assets, versus 38% for the average older millennial family), they have saved far more.

When looking at the median amount of retirement savings versus the average, a more disturbing picture emerges, showing just how little the average older millennial family is saving for eventual retirement.

The median amount of money in higher earners’ retirement account is $90,000 (median being the middle point of a number set, with half the available figures above it and half below). But the median amount is $0 for the typical millennial family, meaning that at least half of millennial-run households don’t have any retirement savings at all.

Millennials and their nonfinancial assets

Most of millennial households’ wealth comes from physical assets, such as houses, cars and businesses.

While nearly 60% of young families don’t own houses today, the lowest homeownership rate since 1989, homes make up the largest share of the family’s nonfinancial assets, Fed data show.

For the average-earning older millennial family, housing represents more than two-thirds of the value of its nonfinancial assets — 66.4%. On average, this group’s homes are valued at $84,000.

The homes of rich millennial households are worth 4.6 times more, averaging $470,000 — though they represents a lower share of total nonfinancial assets — 50%.

Cars are the second-largest hard asset for the average young family to own, accounting for about 14% of nonfinancial assets.

While rich millennials drive fancier cars than their peers — prices are 2.4 times that of average millennials’ cars — their $42,000 car accounts for just 4.5% of their nonfinancial asset. In contrast, they stash as much as 31% of their asset in businesses, 20 percentage points higher than the ordinary millennial.

It’s worth noting that young adults in general are not into businesses. A scant 6.3% of young families have businesses, the lowest percentage since 1989, according to the Fed data. (Among those that do have them, the businesses represent just over 11% of their total nonfinancial assets.)

The student debt gap

Possibly the starkest example of how wealthy older millennials and their ordinary peers manage their finances can be seen in the realm of student loan debt.

A significant chunk of the average worker’s household debt comes in the form of student loans, making up close to 20% of total debt and averaging $16,000. In contrast, the wealthiest cohort carries about $2,000 less in student loan debt, on average, and this constitutes just about 4.6% of total debt.

With less student debt to worry about, it’s no surprise wealthier millennial families carry a larger share of mortgage debt. About 76% of their debt comes from their primary home, to the tune of $233,500, on average. This is 4.5 times the housing debt of a typical young homeowner.

In some cases, the top wealthy have another 11% or so of their total debt committed to a second house, something not many of their less-wealthy peers would have to worry about — affording even a first home is more of a struggle.

When is the right time to start investing?

For many millennials the answer isn’t whether or not it’s wise to save for retirement or invest for wealth but when to start. Generally, paying off high interest debts and building up a sufficient emergency fund should come first. Once those boxes are ticked, how much young workers invest depends on their tolerance for risk and their future financial goals.

“It’s never too much as long as you’ve got money for the emergency fund, and as long as they are funding their other goals not through debt,” says Krista Cavalieri, owner and senior advisor at Evolve Capital in Columbus, Ohio.

The biggest mistake that Cavalieri has seen among her young clients is that very few have been able to establish an emergency fund that will cover at least three to six months’ worth of living expenses.

Kelly Metzler, senior financial advisor at the New York-based Altfest Personal Wealth Management, said older millennials may not be able to save outside of retirement accounts yet, which can be a concern if they want to buy a house or have other large purchases or unexpected expenses ahead.

Cavalieri said that’s because young adults’ money is stretched thin by the varies needs in their lives and the lifestyle they keep.

“Their hands are kind of tied at where they are right now,” she said. “Everyone could clearly save more, but millennials are dealing with large amounts of debt. A lot of them are also dealing with the fact that the lack of financial education put that in that personal debt situation.”

The post Where the Wealthiest Millennials Stash Their Money appeared first on MagnifyMoney.

The Risky Way Retirees Use Reverse Mortgages for Extra Income

If you’re approaching retirement, you’re probably already aware that taking Social Security at age 62 results in getting a much smaller benefit than someone who waits until full retirement age. For most retirees today, full retirement age is 66 or 67, but you can earn an even larger pay out if you can wait till age 70 to start tapping in to your benefits.

Living off your existing savings while you wait the extra eight years to start receiving Social Security benefits can be challenging. For that reason, an increasing number of financial experts are encouraging retirees to use a reverse mortgage as a source of additional income while they wait to start drawing on their Social Security benefits.

Using a reverse mortgage for extra income in retirement can be risky — so risky, in fact, that the Consumer Financial Protection Bureau (CFPB) recently spoke out against it.

“A reverse mortgage loan can help some older homeowners meet financial needs, but can also jeopardize their retirement if not used carefully,” CFPB Director Richard Cordray said in a statement. “For consumers whose main asset is their home, taking out a reverse mortgage to delay Social Security claiming may risk their financial security because the cost of the loan will likely be more than the benefit they gain.”

Still, retirees with significant equity built up in their homes might be tempted to tap into that equity to bridge the gap between when they retire and when they can maximize their Social Security benefit.

A quick recap of what a reverse mortgage is and how it works:

A reverse mortgage is a special type of home loan that allows homeowners age 62 and over to withdraw a portion of the equity they have in the home. Instead of paying interest and fees each month that amount is added to your overall loan balance. When you no longer live in the home, the total loan must be paid back and you will pay no more than the value of the house. With a reverse mortgage you are no longer responsible for the regular monthly payments on your mortgage loan but you are required to keep the home in good condition, as well as paying the property taxes and homeowner’s insurance.

Most reverse mortgages are federally insured by the Home Equity Conversion Mortgage (HECM) program, which requires a strict set of rules and regulations that must be met in order to qualify. Some of those requirements include: occupying the property as your principal residence, continuing to live in the home and not being delinquent on any federal debt. The U.S. Department of Housing and Urban Development has a full list of requirements here.

The pros of using a reverse mortgage

Using a reverse mortgage can provide some additional, predictable income during retirement. Whereas relying solely on your investments could result in unstable returns depending on your portfolio. But a reverse mortgage loan isn’t a bottomless source of cash.

The amount of money you can receive from a reverse mortgage first depends on your principal limit. That’s the amount a lender will be willing to loan you based on a several factors, like your age, the value of the home and the interest rate on your loan. This is where older borrowers have an advantage. According to the CFPB, “loans with older borrowers, higher-priced homes, and lower interest rates will have higher principal limits than loans with younger borrowers, lower-priced homes, and higher interest rates.”

Another big advantage of reverse mortgages are that the proceeds are generally tax free and will not affect Medicare payments.

The risks of a reverse mortgage

It reduces the amount of equity you have in the home, which can complicate a future sale. The equity in your home is generally defined as the amount of ownership you have in a property less any remaining debt. With a regular mortgage you borrow money from the bank and pay down the balance over time. With each payment the loan balance goes down and your equity increases.

You’ll lose home equity. Since a reverse mortgage allows you to borrow from the equity you have in the home, your debt on the home increases and the equity is lowered. A reverse mortgage may limit the options for someone looking to sell their home in retirement, because the loan must be paid upon the sale and there may not be enough equity left to purchase a new home.

It increases your overall debt. As seen in the images above, a reverse mortgage reduces the amount that you own in your home and adds that amount back into your loan balance. This increases your overall debt.

The cost of a reverse mortgage can outweigh the benefits of increasing your Social Security payments. Though you are borrowing from the money you’ve paid into your home, a reverse mortgage isn’t free. Just like your regular initial mortgage you will have to pay interest and fees. Reverse mortgages are very similar and usually include costs such as: mortgage insurance premiums (MIP), interest, upfront origination fees, closing costs and monthly servicing fees.

In the figure above, the CFPB estimates a reverse mortgage will cost $21,600 for someone who uses the option from age 62 to age 67; but the lifetime gain in Social Security from 62 to 67 is $29,640.

Monetarily, in this scenario a reverse mortgage makes sense. However most borrowers use a reverse mortgage for seven years not five as in the previous example. This would bring the cost to $31,900, approximately $3,900 which is more than the lifetime benefit of waiting until 67 for Social Security.

You’re putting your home at risk. You could also lose your home if you no longer meet the loan requirements. This includes not living in the home for the majority of the year for non-medical reasons or living outside of the home for 12 consecutive months for healthcare reasons.

You’re putting your heirs at risk.  When you pass away your heirs will have to pay back the loan, usually by selling home. If there is money left over after the sale, they can keep the difference. However, if the loan balance is more than the value of the home and they want to keep the home they will need to pay the full loan balance or 95% of the appraised value, whichever is less according to the CFPB.

When does it make sense to use a reverse mortgage for income in retirement?

In general, Chartered Financial Analyst Joseph Hough says reverse mortgages are best for retirees who are in good health and expect to live long after retirement. Also, it can be one of the few options retirees have when their retirement income is simply not high enough to cover their basic needs.

Speak with a financial advisor who can help you weigh the particular pros and cons with your specific situation. Every person is different, and there is no one size fits all answer.

When does it not make sense?

A reverse mortgage may not be a good fit for those in bad health due to the risk of losing the home. If you’re planning on selling your home, having a reverse mortgage can complicate the issue because it reduces the amount of equity you have. You could be left in a scenario where the proceeds of the sale do not cover a purchase of a new home because of the cost and fees associated with reverse mortgages.

What are some other ways I can maximize my SS benefit?

Working beyond 62 may be the best option to maximize your Social Security benefit. Doing so allows more time to save for retirement and pay off any debt. You could potentially increase your overall Social Security benefits if your latest year of earnings is one of your highest. Also, if you’re married, consider coordinating your Social Security decisions with your spouse. Other alternatives to a reverse mortgage include selling your home and downsizing to a less expensive place or selling your home to your adult children on the condition you get to live rent-free, says Houge.

The post The Risky Way Retirees Use Reverse Mortgages for Extra Income appeared first on MagnifyMoney.

Think Twice Before You Max Out Your 401(k)

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Financial planners can’t emphasize the importance of saving for retirement enough: The earlier you start saving and the more you contribute, the better. But should you max out your retirement account? And if so, how do you do it? 

Unfortunately, there’s no solution suitable for all; every individual has a different financial situation.  

But let’s start with the basics: The maximum amount of money you can contribute to your 401(k), the retirement plan offered by your company, is currently $18,000 a year if you are under age 50, and $24,000 if you are 50 or older. If you were starting from scratch, you would have to tuck away $1,500 a month to max it out by year’s end.  

This is a big chunk of money. And although there are multiple benefits to saving for retirement, you may want to think twice before hitting that maximum.  

Remember, this is money that, once contributed, can’t be withdrawn until age 59.5 without incurring penalties (with some exceptions).  

What’s more, putting away a significant portion of their savings to max out their retirement fund doesn’t make much sense for some workers.  

If you are fresh out of college and your first job pays $50,000 annually, you’d need to save 36 percent of your paychecks to max out your 401(k) for the year.   

“Everyone needs to save for retirement, and the more dollars you could put in, the earlier, the better, but you also need to live your life,” says Eric Dostal, a certified financial planner with Sontag Advisory, which is based in New York. “To the extent that you are not able to do the things that you want to accomplish now, having a really really robust 401(k) balance will be great in your 60s, but that would cost now.”  

A few things to consider BEFORE you max out your 401(k)

  1. Do you have an emergency fund for rainy-day cash? If not, divert any extra funds to establish a fund that will cover at least three to six months’ worth of living expenses.  
  2. Do you have high-interest debt, such as credit card debt? High-interest debts, like credit cards, might actually cost you more in the long run than any potential gains you might earn by investing that money in the market.  Still, if you can get a company match, you should try to contribute enough to capture the full match. It never makes sense to leave money on the table.  
  3. Do you have other near-term goals? Are you planning to buy a house or have a child anytime soon? Do you want to travel around the world? Do you plan to pursue an advanced degree? If so, come up with a savings strategy that makes room for your nonretirement goals as well. That way you can save money for those big-ticket expenses and will be less likely to turn to credit cards or other borrowing methods. 

Maximize your 401(k) contributions

If your emergency fund is flush, your bills are paid and you’re saving for big expenses, you are definitely ready to beef up your retirement contributions.   

First, you’ll want to figure out how much to save.   

At the very least, as we said above, you should contribute enough to qualify for any employer match available to you. This is money your employer promises to contribute toward your retirement fund. There are several different ways a company decides how much to contribute to your 401(k), but the takeaway is the same no matter what — if you miss out on the match, you are leaving free money on the proverbial table. 

If you are comfortable enough to start saving more, here is a good rule of thumb: Save 10 percent of each paycheck for retirement, though you don’t have to get up to 10 percent all at once.  

For instance, try adding 1 percent more to your retirement fund every six months. Some retirement plans even offer automatic step-up contributions, where your contributions are automatically increased by 1 or 2 percent each year. 

Larry Heller, a New York-based certified financial planner and president of Heller Wealth Management, suggests that you increase your contribution amount for the next three pay periods and repeat again until you hit your maximum.  

“You will be surprised that many people can adjust with a little extra taken out of their paycheck,” Heller said.   

Once you’re in the groove of saving for retirement, consider using unexpected windfalls to boost your savings. If you get an annual bonus, for example, you can beef up your 401(k) contribution sum if you haven’t yet met your contribution limit.  

A word of caution: If you’re nearing the maximum contribution for the year, rein in your savings. You can be penalized by the IRS for overcontributing. 

If your goal is to save $18,000 for 2017, check how much you’ve contributed for the year to date and then calculate a percentage of your salary and bonus contributions that will get you there through the year’s remaining pay periods.  

The post Think Twice Before You Max Out Your 401(k) appeared first on MagnifyMoney.

10 Smart Financial Retirement Moves You Can Make Today

An early distribution penalty isn't always inevitable. These exceptions might just apply to you.

Some employers offer financial and retirement advice to their workers, but you may not have been so lucky. And considering that 30% of workers outside of local and state government and the private sector don’t have access to retirement benefits from their employers, it’s no wonder people have anxieties about their futures.

But don’t worry! There are plenty of moves you can make now to ensure your retirement—whether decades or just years away—won’t be a stressful financial experience for you. Here’s a 10-step program for retirement bliss.

1. Focus on Your Game Plan

Without a strategy for financial retirement, no amount of advice will get you where you need to be. So your first step is to take stock of your current financial situation, including your savings, debts, and investments. Then decide on your retirement goals. Do you want to keep your current income and spending lifestyle, or could you get by with a little less? At what age do you want to retire? Those born after 1960 will generally retire at 67, but some people can retire earlier while others need to work longer.

2. Take Advantage of Benefits Offered by Your Employer

Your employer may offer one or several retirement benefits, like 401(k)s, pension plans, health savings accounts (HSAs), or other benefits. If so, you should enroll—especially if your employer offers matching funds. Start contributing the maximum amount you can afford—for example, try to shoot for at least 25% of your income if you’re in your 40s—and you should have a nice nest egg to use when you retire.

3. Consider Other Retirement Accounts

If your employer doesn’t offer retirement benefits, you can still enroll in special accounts that help you save for your future. For example, using an individual retirement account (IRA) can ensure financial stability after retirement. IRAs come in two types: traditional or Roth, each with its own advantages and disadvantages. If these aren’t an option, you may consider traditional savings or investment accounts, which also let you grow your retirement wealth over the long term.

4. Avoid Taking Benefits Early

In most cases, you shouldn’t withdraw from or take a loan from retirement accounts until you retire or you may have to pay additional penalties. Learn the rules about spending retirement money, and unless you’re in a serious bind, leave the money where it belongs: safely in its account.

5. Start Investing

In addition to 401(k)s or employer-based retirement accounts, you can start putting some money into personal investments. If you’re an investment first-timer, you might want to check out investment apps like Acorns, Betterment, or Digit. These services let you make small, automatic deposits into accounts that, once you’ve got a larger balance, could blossom into full-fledged nest eggs. You may even qualify for a special credit card that puts a percentage of purchases into a retirement account.

6. Tackle Your Spending Habits

If you’re one of the 60% of Americans who spend as much as or more than they earn, you should consider improving your money habits now. Living above your means could spell problems for your finances during retirement by leaving you with costly debt, bad credit, and fewer financial options. Take the time to assess your spending, create a budget, and build smart spending habits to set yourself up for a frugal yet fulfilling future.

7. Manage Your Debt

Alongside improved spending efforts, you should make sure your debt levels are sufficiently managed before you retire. Large debts, especially the costly, easy-to-misuse kinds with high interest rates (e.g., credit cards), should be paid off as quickly as possible. Other debts, like student loans, auto loans, and mortgages, are less worrisome, but if you can pay them off too, even better. Heading into retirement debt-free will free up time, money, and your mind for an easier life.

8. Improve Your Credit Score

Managing and paying off debt improves your credit score, and having good credit should be one of your retirement goals. If you plan to make large purchases—homes, cars, boats, whatever your lifestyle—after you stop working, you may need to apply for loans or mortgages. Having a pristine credit score will save you money and minimize payments in your later decades. The first step to improve your credit is to find out where you stand now, and then work to inch the score upward.

9. Get the Right Insurance Coverage

At age 65, you can apply for Medicare, the federal health coverage program available to most American retirees. But Medicare doesn’t come totally free, and you have lots of choices when deciding on health coverage in retirement. Make sure you have the right insurance for your needs so you don’t get stuck with costly medical bills. The same goes for auto, home, and other insurance. As you age, your insurance options change, so make sure you’ve examined your options and made the right choices.

10. Adjust Your Plan as Needed

Because you can’t plan for everything, be ready to adjust your financial retirement goals if necessary. Changing or losing your job, getting married or divorced, or experiencing costly emergency expenses can all be reasons to reassess your retirement plans.

Even if your employer hasn’t given you any financial retirement advice, now’s the time to start preparing for your future. You can set yourself up for a comfortable retirement by taking these steps right away—no matter which stage of life you’re in.

Image: Squaredpixels

The post 10 Smart Financial Retirement Moves You Can Make Today appeared first on Credit.com.

Why Sabbaticals Could Be the New Pre-Retirement

Brad N. Shaw, a Dallas, Texas-based serial entrepreneur, took a two-year sabbatical from 2011-2013 to spend more time with his family. He’s pictured here with his family in Vail, Colorado. (Photo courtesy of Brad M. Shaw)

Serial entrepreneur Brad M. Shaw made a bold decision several years ago to take two years off from work and move his family to Vail, Colo.

Taking a two-year sabbatical had its challenges, the major one being uprooting his family in pursuit of more work-life balance and a change of scenery. But overall, he says taking time off was more than worth it — both for his family and his business.

“My daughter was growing up so fast,” says Shaw, who is CEO of a web design firm in Dallas. “As a serial entrepreneur, I was always away traveling or at the office. I wanted to be a present father and play a role in her upbringing. I also wanted to show her a life outside of the Dallas suburbia bubble.”

‘No reason to wait’

The concept of taking a sabbatical is not new. People have been taking them for decades. They’re typically thought of happening in academia, in which professors are paid to take time off for research. But sabbaticals have transcended academia and have spread into the general workforce in recent decades.

Thanks to a new wave of workers who value purpose over stability, the upswing of the gig economy, and companies that offer unlimited vacation time or paid sabbaticals, taking an extended break is becoming more of a reality for many. Many major companies in the United States offer unlimited vacation time or paid sabbaticals, such as Groupon, General Electric, and Adobe.

There’s also the reality that today’s American workers are not able to retire as early as previous generations — and they’re living longer, healthier lives. So a sabbatical can serve as a mini retirement, or a chance to take a break from the grind of 9-to-5 life.

Ric Edelman, the founder and executive chairman of Edelman Financial Services, explores this topic in his new book, “The Truth About Your Future: The Money Guide You Need Now, Later, and Much Later.” He says the combination of people living longer and being healthier in old age means the notion of retiring at 65 will be gone in the near future, both because it won’t be affordable and people will get restless.

Daniel Howard took a one-year, unpaid sabbatical in 2008 following the financial crisis to recharge and return to work with a fresh perspective. (Photo courtesy of Daniel Howard)

“You’ll be healthy enough to work, you’re going to want to work, and economically, you’re going to need to work,” he says. “For all those reasons, you’ll continue working. And so that notion that you’ll wait until you’re 60 to take that around-the-world cruise really won’t exist. There won’t be a particular reason to wait.”

Edelman says that instead of the traditional life path (go to school, get a job, retire, die), we’ll have a cyclical one in which people go to school, get a job, take a sabbatical, go back to school, take a different job, etc. Instead of having one big chunk of a 30-year retirement, people will take two years here, three years there, six months here, and they’ll enjoy time off throughout their life at various intervals.

Research has also proven that companies and the economy benefit when employees take sabbaticals. According to a report by Project: Time Off, an offshoot of the U.S. Travel Association, there has been a jump in employees taking time off in the last year. Unused vacation days cost the economy $236 billion in 2016 — an amount that could have supported 1.8 million jobs. In essence, employees not cashing in on their paid time off hurts the economy because employees are forfeiting money that could instead have been used to create new jobs.

Dan Clements, author of “Escape 101: The Four Secrets to Taking a Career Break Without Losing Your Money or Your Mind,” says the biggest benefit of taking a sabbatical is the perspective change it offers.

“People come back from sabbaticals with a completely different vision for how they want to live their life,” Clements tells MagnifyMoney. “They come back and they change jobs or they transform themselves in the company they’re in or they change their business.”

Upon returning to Dallas, Shaw says he made the decision to forgo scaling up his business in favor of running it on a smaller scale so he could be less stressed.

“The time away allowed me to reset my business ideas,” he says.

Clements thinks many companies have begun to offer unlimited vacation days or paid sabbaticals to keep up with the new generation entering the workforce, because by and large, millennials value purpose over stability. Companies want to keep employees happy by offering them the opportunity to find purpose in a way their 9-to-5 job might not be able to.

“You have a different generation of people entering the workforce for whom work means something different,” Clements says. “What they expect from work is not necessarily security and a paycheck, but what they expect is meaning from work more than previous generations have. Part of the way companies can supply that is to give people the time and flexibility to find it.”

Taking the plunge

Tori Tait, the director of content and community for The Grommet, an e-commerce website that helps new products launch, took a 30-day sabbatical in August. Her company offers paid sabbaticals at employees’ five-year mark. Tait, who lives in Murrieta, Calif., spent time relaxing in Huntington Beach, Calif., boating on the Colorado River, and living on a houseboat in Lake Mead, Ariz. Like Shaw, she says the biggest benefits for her were time off with family and a fresh perspective once she returned to work.

“I’m a working mom, so summers are often filled with me in the office, and [my kids] wishing we were at the beach,” she says. Tait says she enjoyed how during her month off, she didn’t have work in the back of her mind the way people often do when on a five- or six-day vacation.

Tori Tait, pictured with her daughters London, 10, and Taylor, 16, took a company-sponsored, 30-day sabbatical in August 2017. (Photo courtesy of Tori Tait)

Her biggest piece of advice for those planning a sabbatical is to not dwell on the planning aspect of it. “I grappled with trying to plan how I would spend my time,” she says. “Would I travel abroad? Volunteer? Finally do that side project I’ve been thinking about? In the end, I just thought, What is it that I always wish I had more time to do? The answer for me was: spend quality time with my family. So that’s what I did.”

Daniel Howard, the director at Search Office Space, a website that helps businesses all over the world find office space, took a sabbatical after the financial crisis in 2008. He says he took 12 months off to recharge in hopes of returning to work with more optimism and drive. His employers didn’t pay him for the time off, but promised him his job would be there upon his return.

He traveled with his then-girlfriend (now his wife) to Southeast Asia, Australia, New Zealand, Fiji and Central America. They left their phones at home and relied on physical maps to get around. Aside from the occasional email to family to check in, they were completely disconnected. The biggest benefit for him? “The ability to completely disconnect from my working life and the opportunity to become a more well-rounded person by immersing myself in different cultures and experiences,” Howard says.

Although many people take their sabbaticals overseas, one doesn’t need to travel around the world to reap the benefits. Extended time away from work and technology is beneficial no matter where you are.

“I think for a lot of people, a sabbatical is the first real vacation they’ve ever taken,” Clements says. “I tell people that taking a one-week vacation is sort of like trying to swim in a puddle. You wade in a little bit, and you’re barely wet, and then you have to go inside. When you actually get away from your life for two or three times longer than you’ve ever taken a break from work, you get this sense of perspective that I think most people don’t normally get a chance to experience.”

The 4 stages of preparing for a sabbatical

If you don’t work for a company that offers unlimited vacation days or paid sabbaticals, that doesn’t mean you can’t take one. Clements shares his steps for saving up for a sabbatical:

  1. Boost your earnings. Try to figure out if there’s a way you can earn more before taking your sabbatical. Can you finally ask for the raise you’ve been wanting? Can you do freelance work on the side? Can you rent out part of your home on Airbnb, or drive for Uber? Consider all of your options.
  2. Make it automatic. Have money automatically withdrawn from your bank account the same way you would for retirement, a mortgage or automatic bill payments.
  3. Put it out of reach. Once you set aside money in a separate account, make sure it’s out of reach. Put it in a savings account that isn’t accessible online or via the ATM. If you have to physically go to the bank to withdraw cash, you’ll be less tempted to do so.
  4. Stretch yourself. Don’t be afraid to make your automatic savings plan more aggressive than you think you can handle. Challenge yourself to save more than you think you need, because you can always change the amount if you have to.

The post Why Sabbaticals Could Be the New Pre-Retirement appeared first on MagnifyMoney.

Ignoring These 6 Financial Moves Could Ruin Your Retirement

Working for a company with no retirement plans doesn't mean you can't create your own.

You finally have enough money to retire, and you’re counting down the minutes—no, seconds—until you walk out the door for the last time. The excitement is palpable, and you can hardly believe you’ve reached this milestone. After all, it probably took at least thirty years of diligent investing to make your retirement dreams come true.

While I understand why you’re probably bouncing off the walls, you still have some work to do if you want to actually stay retired.

Say what?

Yep, you read that right. If you don’t complete a handful of important tasks now, you could wind up heading back to work part-time or cutting back on spending just to get by.

To avoid ruining your retirement, you need to make a handful of smart financial moves now. Here are the most important steps to take to keep your retirement safe and on track.

1. Have the “Money Talk” with Your Adult Kids

While giving money to adult kids is a taboo subject nobody wants to talk about, it’s actually a lot more common than people think. According to a 2015 study from Pew Social Trends, approximately 61% of parents with adult children in the US admitted to helping them financially within the previous 12 months.

Helping adult kids may not have been a big deal when you were working, but it can make a huge difference to your bottom line once you’re on a fixed income. This is why you need to have the “money talk” right away, said North Dakota financial adviser Benjamin Brandt.

“If you are nearing retirement and financially supporting adult children, now would be the time to have some conversations about money,” noted Brandt. “Adult children need to know that continued financial support could jeopardize your golden years.”

If you set expectations early, your adult kids will have time to learn how to fend for themselves and break the cycle of living paycheck to paycheck.

2. Dial Down Your Investment Risk

Your retirement plan is most vulnerable during the final years leading up to your target retirement date. With that in mind, it’s crucial to reconsider your desired level of risk as you start getting close.

“One of the best ways to reduce the risk of outliving your money is to reduce the risk you’re taking in your investment portfolio during those last few years,” said San Diego financial adviser Taylor Schulte. “This means allocating less to stocks and more to high-quality bonds.”

Once you settle into retirement, you can always consider increasing the risk again if it aligns with your long-term goals.

3. Meet with a Financial Planner

Does this sound overly complicated?

“If you think this might be a challenging task, you can always hire a fee-only financial adviser to put together an investment plan for you or use a target date mutual fund that automatically reduces the portfolio’s risk as you approach retirement,” said Schulte.

And, if you haven’t done so already, meeting with a financial planner is probably the smartest move you can make anyway. After all, there is no one-size-fits-all retirement income portfolio or investment approach retirees should take.

A financial planner can find the right mix for your financial goals, however.

“The right mix of stocks, bonds, and other asset classes should be chosen based on the cash flow you need to support the life you want,” said financial planner Eric C. Jansen of AspenCross Wealth Management. “One sure way to ruin your retirement is to let your retirement portfolio dictate the lifestyle you have, rather than being properly designed to support the lifestyle you desire.”

4. Create a Long-Term Financial Plan

Speaking of meeting with a financial planner, you can rely on these professionals to help you create a long-term financial plan. With a solid plan in place, you won’t have to stress over market fluctuations that would normally leave you stressing out.

“We are all emotional creatures,” said financial planner Don Roork of AssetDynamics Wealth Management.

It’s natural to panic when the market drops, or to feel a surge of happiness and excitement when one of your investments increases in value. In retirement, however, you don’t need all that drama. What you really need is a long-term plan that will leave you protected regardless of volatility in the market.

“The next time the market falls and you’re convinced that ‘this time is different’ and ‘the financial world is positively collapsing’ and ‘I’m going to lose all my money,’ don’t react emotionally and yank all the money out of your well-managed portfolio and move into cash,” said Roork.

Leave it to your adviser to worry about your portfolio—that’s their job, after all.

“Financial advisers don’t have a crystal ball of omniscience into your financial future, but they can skillfully help you evaluate the economic and financial market circumstances, and help you avoid emotion-driven investment thinking and actions that will ruin your retirement,” said Roork.

5. Think Long and Hard about Your Long-Term Care Options

While many people believe that long-term care insurance is too expensive to consider, not having a long-term care plan in place can ruin your retirement.

No one ever thinks they’re going to need long-term care or have to move to some kind of facility, but more and more individuals are finding out that’s not the case, noted Kansas City financial planner Clint Haynes.

Even if you don’t think it’s ever going to happen, you still have to prepare for it just in case.

“Whether it’s purchasing long-term care insurance or setting up steps with your children, a plan needs to be in place,” said Haynes. “The costs of a long-term care facility can be exorbitant and the emotional burden on your children can be even more trying. Take the time to create a plan with your family.”

And yes, this is another area where you can reach out to a financial planner or insurance professional for help. If the day comes where you need long-term care for any reason, you’ll be glad you did.

6. Decide How to Handle Social Security

Failing to plan is the same as planning to fail, and that’s especially true when we’re talking about Social Security.

“Many couples often opt to take Social Security at the earliest possible age of 62, but this isn’t always the best idea,” said financial planner Jude Wilson of Wilson Group Financial. The worst part is, most people go this route because they never took the time to compare all their options and potential outcomes.

As Wilson reminds us, taking Social Security early (at age 62) means agreeing to a payout that could be up to 25% less than what you’d get if you waited. If you wait until you reach full retirement age (age 66 or 67, depending on your birthdate), you’ll receive the full benefit you worked for.

The lower payout affects more than today’s Social Security check noted Wilson. “Future cost of living adjustments will be based on that lower amount. Over your lifetime, the cumulative effect of getting cost of living adjustments on that lower benefit adds up like a snowball rolling downhill in an avalanche.”

But, that’s not all. Taking Social Security at age 62 can also do harm to a surviving spouse in the future.

“When one spouse passes away, the survivor will receive the higher of the two Social Security checks, not both,” said Wilson.

While there are certainly times when an early payout is better, retirees who pick this option without weighing the pros and cons could wind up missing out on huge sums of money over time.

If that won’t ruin your retirement, I don’t know what will. The good news is that you can start implementing these six financial tips into your planning today and reap the rewards in the years to come. For more information on smart spending decisions in retirement, check out our picks for the best credit cards for retirees.

Image: Portra

The post Ignoring These 6 Financial Moves Could Ruin Your Retirement appeared first on Credit.com.

What to Do If Your Company Doesn’t Offer a Retirement Plan

Working for a company with no retirement plans doesn't mean you can't create your own.

The ability to divert part of your paycheck to an investment account and build a nest egg is a huge advantage in the grand scheme of life. In fact, much of the American workforce relies on employer-sponsored retirement plans to do so.

But while we think of retirement accounts as part of a standard workplace benefits package, the reality is that not every employer offers a tax-advantaged retirement plan. The good news is that it’s possible to save for retirement on your own. Here’s how:

Start with an Individual Retirement Account (IRA)

If you have earned income, you are eligible to open an IRA. It’s possible to contribute up to $5,500 to an IRA in 2017. Individuals over the age of 50 can contribute an extra $1,000 each year to “catch up” on their retirement savings. There are two main types of IRAs to choose from:

Traditional IRA

When you contribute to a traditional IRA, you receive a tax deduction. Your investment broker will send you a statement at the end of the year so you know how much to deduct.

Because you receive a tax deduction now, you will have to pay taxes later when you withdraw money from your retirement account. You can start withdrawing money at age 59 and a half, and pay taxes on it at your marginal rate.

Note that if you or your spouse has a retirement plan through work, or if you have a higher income, your deduction eligibility phases out with a traditional IRA.

Roth IRA

With a Roth IRA, you make contributions with after-tax money, and the investments grow tax-free. So, you don’t get a tax advantage today, but you don’t have to worry about paying taxes on your future withdrawals.

Although this sounds pretty great, it’s important to note the income restrictions on the Roth IRA. Your ability to contribute phases out starting at $118,000 a year as a single filer in 2017. Once you reach $133,000 in income for the year, you can’t contribute to a Roth IRA at all. Instead, you might need to switch to a traditional IRA.

Choosing Between a Traditional & Roth IRA

Making this decision mainly focuses on your expected tax situation. If you think your taxes will be higher in the future, you can save money by paying taxes now at a lower rate and using a Roth IRA. However, if you think your tax bill will decrease later, try to avoid paying taxes today with the help of a traditional IRA contribution tax deduction.

Other IRA Options

Do you have a side gig on top of your full-time job? If so, use that as a reason to access some of the self-employed IRA options, such as SIMPLE IRA and SEP IRA accounts.

These IRA accounts often allow a higher yearly contribution than a traditional or Roth IRA. For 2017, the SIMPLE allows up to $12,500 in contributions each year with a $3,000 potential catch-up contribution. The SEP IRA has a limit of the lesser of 25 percent of your compensation or $54,000 for 2017.

Open Your IRA

Opening an IRA is relatively simple. You can open an IRA account with most online brokers and investors. Some even allow you to open an account with no minimum or opening balance. Other brokers might require a regular monthly contribution of $100 to create an account.

Many brokers offer access to low-cost index funds and ETFs for instant diversity and a reduction in fees. Set up an automatic transfer from your checking account into your investment account.

Consider talking to your human resources department to see if you can have part of your paycheck diverted to your IRA. Even if you don’t have an employee retirement plan, you can still passively generate savings for your future self.

See how debt affects your ability to save with a free credit report snapshot on Credit.com.

Consider the myRA

A few years ago, the government started an IRA alternative called the myRA. If you have a small amount to contribute, this can be ideal. You contribute as little as $5 per paycheck. Your tax-deductible contribution is invested in the Government Securities Fund. Your annual contribution limit and tax benefit is in line with a traditional IRA.

Once your account balance reaches $15,000, or after 30 years, you have to move the money into a private IRA. Plus, you don’t have as many choices for investing with the myRA. Your money has to go into the specified fund. Because the barrier to entry is so low, it’s a good starter retirement account as long as you plan to upgrade later.

Open a Health Savings Account (HSA)

Health care costs can present a challenge during retirement. One way to address this issue, especially if your employer doesn’t offer a retirement plan, is with the HSA.

Not only do you receive a tax deduction for your contributions, but also the money grows tax-free as long as you use it for qualified health-related costs. While you can use the money now, it’s a good strategy to let the money grow. Plan to use the HSA for health care costs during retirement to capitalize on long-term, tax-free growth.

Once you reach 65, you can treat your HSA like a traditional IRA (with most of the same rules). However, integrating the HSA into your overall plan by using it in conjunction with an IRA can help you maximize your assets during retirement.

Are You Eligible for a Solo 401(k)?

Another option for those with side gigs is the solo 401(k). If you have a side business on top of your work, and you don’t have any employees, you can take advantage of higher 401(k) limits by opening a solo 401(k). One advantage to the Roth solo 401(k) is that it doesn’t come with the income restrictions you see with a Roth.

A solo 401(k) comes with a very generous contribution limit. On the employee side, you can contribute up to $18,000 for 2017. Your business can also contribute a percentage of income (20% or 25%, depending on your type of business). For those 50 and over, contributions to a participant’s account, not counting catch-up contributions, can’t exceed $54,000

These accounts are harder to find than IRAs. You might need to speak with a specialty brokerage or your bank to open a solo 401(k).

Taxable Investment Accounts

Finally, you don’t have to limit yourself to tax-advantaged retirement accounts. Any regular brokerage account can help you save for retirement. Brokers such as Acorns and Robinhood can help you invest pocket change for the future.

When investing through taxable investment accounts, though, you need the discipline to avoid withdrawing the money before you retire. Taxable investment accounts don’t restrict your access in the same way, so it can be tempting to raid your retirement fund for today’s expenses.

Get Started Now

Regardless of your employer’s involvement, you need to make room in your budget for retirement savings. No matter how you go about it, the important thing is to start investing with retirement in mind. The earlier you start, the more time your money has to grow.

Image: Portra

The post What to Do If Your Company Doesn’t Offer a Retirement Plan appeared first on Credit.com.

Seniors Are Getting Crushed by Debt, New MagnifyMoney Analysis Shows

More American seniors are shouldering debt as they enter their retirement years, according to a new MagnifyMoney analysis of data from the latest University of Michigan Retirement Research Center Health and Retirement Study release. MagnifyMoney analyzed survey data to see whether debt causes financial frailty during retirement. We also spoke with financial experts who explained how seniors can rescue their retirements.

1 in 3 Americans 50 and older carry non-mortgage debt

The Health and Retirement Study from the University of Michigan Retirement Research Center surveys more than 20,000 participants age 50+ who answer questions about well-being. The survey covers financial topics including debt, income, and assets. Since 1990, the center has conducted the survey every other year. They released the 2014 panel of data in November 2016. MagnifyMoney analyzed the most recent release of the data to learn more about financial fitness among older Americans.

In an ideal retirement, retirees would have the financial resources necessary to maintain the lifestyle they enjoyed during their working years. Debt acts as an anchor on retiree balance sheets. Since interest rates on debts tend to rise faster than earnings from assets, debt has the power to destroy the balance sheets of seniors living on fixed incomes.

We found that nearly one-third (32%) of all Americans over age 50 carry non-mortgage debt from month to month. On average, those with debt carry $4,786 in credit card debt and $12,490 in total non-mortgage debt.

High-interest consumer debt erodes seniors’ ability to live a quality lifestyle, says John Ross, a Texarkana, Texas-based attorney specializing in elder law.

“From an elder law attorney perspective, we see a direct correlation between debt and institutional care,” Ross says. “Essentially, the more debt load, the less likely the person will have sufficient cash assets to cover medical care that is not provided by Medicare.”

Even worse, debt leads some retirees to skip paying for necessary expenses like quality food and medical care.

“The social aspect of being a responsible bill payer often leads the older debtor to forgo needed expenses to pay debts they cannot afford instead of considering viable options like bankruptcy,” says Devin Carroll, a Texarkana, Texas-based financial adviser specializing in Social Security and retirement.

Some older Americans may even be carrying debt that they don’t have the capacity to pay.

According to our analysis, 40% of all older Americans have credit card debt in excess of $5,000. More than one in five (22%) Americans age 50+ have more than $10,000 in credit card debt. On average, those with more than $10,000 in credit card debt couldn’t pay off their debt even by emptying their checking accounts.

Over a third of American seniors don’t have $1,000 in cash

It’s not just credit card debtors who struggle with financial frailty approaching retirement. Many older Americans have very little spending power. More than one-third (37%) of all Americans over age 50 have a checking account balance less than $1,000.

Low cash reserves don’t just mean limited spending power. They indicate that American seniors don’t have the liquidity to deal with financial hardships as they approach retirement. This is especially concerning because seniors are more likely than average to face high medical expenses. Over one in three (36%) Americans who experienced financial hardship classified it as an unexpected health expense, according to the Federal Reserve Board report on the Economic Well-Being of U.S. Households in 2015. The median out-of-pocket health-related expense was $1,200.

Debt pushes seniors further from retirement goals

Seniors carrying credit card debt exhibit other signs of financial frailty. For example, seniors without credit card debt have an average net worth of $120,000. Those with credit card debt have a net worth of just $68,000, 43% less than those without credit card debt.

The concern isn’t just small portfolio values. For retirees with debt, credit card interest rates outpace expected performance on investment portfolios. Today the average credit card interest rate is 14%. That means American seniors who carry credit card debt (on average, $4,786) pay an average of $670 per year in interest charges. Meanwhile, the average investment portfolio earns no more than 8% per year. This means that older debtors will earn just $4,508 from their entire portfolio. Credit card interest eats up more than 15% of the nest egg income.

For some older Americans the problem runs even deeper. One in 10 American seniors has a checking account balance with less than $1,000 and carries credit card debt. This precarious position could leave some seniors unable to recover from larger financial setbacks.

Increased debt loads over time

High levels of consumer debt among older Americans are part of a sobering trend. According to research from the University of Michigan Retirement Research Center, in 1998, 36.94% of Americans age 56-61 carried debt. The mean value of their debt (in 2012 dollars) was $3,634.

Over time debt loads among pre-retiree age Americans are becoming even more unsustainable. Today 42% of Americans age 50-59 have debt, and their average debt burden is $17,623.

Credit card debt carries the most onerous interest rates, but it’s not the only type of debt people carry into retirement. According to research from the Urban Institute, in 2014, 32.2% of adults aged 68-72 carried debt in addition to a mortgage or a credit card, and 18% of Americans age 73-77 still have an auto loan.

Even student loan debt, a debt typically associated with millennials, is causing angst among seniors. According to the debt styles study from the Urban Institute, as of 2014, 2%-4% of adults aged 58 and older carried student loan debt. It’s a small proportion overall, but the burden is growing over time.

According to the Consumer Financial Protection Bureau, in 2004, 600,000 seniors over age 60 carried student loan debt. Today that number is 2.8 million. Back in 2004 Americans over age 60 had $6 billion in outstanding student loan debts. Today they owe $66.7 billion in student loans, more than 10 times what they owed in 2004. Not all that student debt came from seniors dragging their repayments out for 30-40 years. Almost three in four (73%) older student loan debtors carry some debt that benefits a child or grandchild.

Even co-signing student loans puts a retirement at risk. If the borrower cannot repay the loan on their own, then a retiree is on the hook for repayment. A co-signer’s assets that aren’t protected by federal law can be seized to repay a student loan in default. Because of that, Ross says, “We never advise a person to co-sign on a student loan. Never!”

How older Americans can manage debt

High debt loads and an impending retirement can make a reasonable retirement seem like a fairy tale. However, an effective debt strategy and some extra work make it possible to age on your own terms.

Focus on debt first.

Carroll suggests older workers should prioritize eliminating debt before saving for retirement. “Several studies have shown a direct correlation between debt and risk of institutionalization,” he says. Debt inhibits retirees from remodeling or paying for in-home care that could allow them to age in place.

Downsize your lifestyle

As a first step in eliminating debt, seniors should check all their expenses. Some may consider drastic measures like downsizing their home.

Cut off adult children

Even more important, seniors with debt may need to stop supporting adult children.

According to a 2015 Pew Center Research Poll, 61% of all American parents supported an adult child financially in the last 12 months. Nearly one in four (23%) helped their adult children with a recurring financial need.

Wanting to help children is natural, but it can leave seniors financially frail. It may even leave a parent unable to provide for themselves during retirement.

Work longer

Older workers can also eliminate debt by focusing on the income side of the equation. For many this will mean working a few years longer than average, but the extra work pays off twofold. First, eliminating debt reduces the need for cash during retirement. Second, working longer also allows seniors to delay taking Social Security benefits.

Working until age 67 compared to age 62 makes a meaningful difference in quality of life decades down the road. According to the Social Security Administration, workers who withdraw starting at age 62 received an average of $1,077 per month. Those who waited until age 67 received 27% more, $1,372 per month.

Retirees already receiving Social Security benefits have options, too. Able-bodied retirees can re-enter the workforce. Homeowners can consider renting out a room to a family member to increase income.

Consider every option

If earning more money isn’t realistic, a debt elimination strategy becomes even more important. Ross recommends that retirees should consider every option when facing debt, including bankruptcy. He explains, “A 65-year-old, healthy retiree would be well advised to pay down the high-interest debt now. Alternatively, an 85-year-old retiree facing significant health issues is better off filing bankruptcy or just defaulting on the debt. For the older person, their existing assets are a lifeline, and a good credit score is irrelevant.”

Don’t take on new debt

It’s also important to avoid taking on new debt during retirement. “The only exception,” Ross explains, “[is taking on] debt in the form of home equity for long-term medical care needs, but then only when all other reserves are depleted and the person has explored all forms of government assistance such as Medicaid and veterans benefits.”

Every senior’s financial situation differs, but if you’re facing financial stress before or during retirement, it pays to know your options. Conduct your research and consult with a financial adviser, an elder law attorney, or a credit counselor from the National Foundation for Credit Counseling to choose what is right for your situation.

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