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Average Credit Card Debt by Age

Average Credit Card Debt by Age

Apr 2021

A report by Federal Reserve economist Joanna Stavins combined Equifax data with the 2015- 2016 Federal Reserve Bank of Boston’s Survey of Consumer Payment Choice (SCPC) on how consumers pay for purchases. Comparing self-reported measures with objective data, she found that people tend to have fewer credit cards with higher limits than they report. According to her research, it’s estimated that 44% of adults have revolving credit that they don’t pay off in full each month with an average balance of $6600.

The study also included average credit card balances for various age brackets. Debt is becoming an increasingly larger part of the financial planning landscape. And it has different implications at different ages. Here are the average balances for each age group in the study and how carrying debt can impact them at each phase of life.

Age <25:The average credit card debt for this age group is $2340*. You may be a recent graduate with your first real job, earning your own money for the first time in your life — finally paying your own way. But you’re also likely having your first experience trying to balance saving and paying off debt if you graduated with student loans. Having an extra credit card payment can make that juggling act even harder. Or it can delay independent living altogether. Adopting a “cash only” policy for things you want early in life can help stave off larger problems later.

Age 25-34:: With an average balance of $3240 on your credit cards, you might be buying your first home and starting a family. With growing credit card debt, it could push that first home purchase a few years down the road or out of site altogether. When planning to buy a home or start a family, it’s important to look at your overall budget ahead of time. This is a terrific opportunity to sit down with your financial advisor to help set you up for success and make this exciting time in your life as stress free as possible.

Age 35-44:Carrying an average credit card balance of $5480, you’re in your prime earning years and you may be on your second or even third home. There could be an even larger family at this point and temptation to start cashing in on your years of hard work and higher salary. While you certainly deserve to enjoy the fruits of your labor, it’s important not to sacrifice future happiness for today’s pleasures. Maintain and increase your contributions to your 401(k) and other retirement accounts. It’s often easier to bump up contributions after a raise or bonus. It will become increasingly harder to make up for lost time later.

Age 45-54:With life in full swing and an average credit card debt of $6250, you may be facing some additional financial challenges during this phase of life. You might need to fund an expensive college education for one or more kids, pay for a wedding or two — and you might even have to start pitching in to help your parents. It can be easy to lose track of your own financial goals with so much going on. Stay in regular contact with your financial advisor and start making catch-up contributions to your retirement accounts if you need to once you qualify.

Age 55-64:Retirement is starting to loom large in the window and you need to start getting your ducks in a row. Hopefully, you’re carrying a little less debt now, on average $5360 on your credit cards — but it’s no time to become complacent. Have a plan to reduce debt as much as possible before your income stream dries up. Make sure you’re addressing healthcare financial risks by taking care of yourself and consider long-term care insurance if you don’t already have it.

Age >65:Congratulations on your retirement! Or maybe not so fast. Excessive debt can delay or even prevent retirement altogether. The average credit card debt for this age bracket is $3630. If you’re still carrying a balance, try to pay it down as fast as you can. If you’re not employed full-time any longer, consider a little part-time work or some temporary lifestyle adjustments to get the job done faster and enjoy your golden years debt-free.

*To account for people who declined to participate, the researcher made some statistical adjustments to keep study results nationally representative.

source: https://www.bostonfed.org/publications/research-department-working-paper/2018/credit-card-debt-and-consumer-payment-choice.aspx

Tags: reduce debt, debt and retirement, debt, retirement

Debt and Retirement - How to Handle both when Nearing Retirement

Debt and Retirement - How to Handle both when Nearing Retirement

Apr 2021

An increasing number of Americans are facing an uphill battle just trying to save enough and earn enough on their savings to be able to retire on time. Carrying much higher debt burdens than previous generations, many pre-retirees have had to put their savings on the back burner to focus on debt reduction, which, for practical purposes is smart, but it is also the primary reason why some will need to delay retirement or drastically downsize their retirement lifestyle. In retirement, cash is king, and every dollar of debt is a direct drain on your cash flow. But, it’s never too late (nor too early) to take counter measures that will help you get back on track.

Should I try to pay off my mortgage before retirement?

The days of mortgage-burning parties are nearly a thing of the past. As a result of the home refinancing hey days of the last five to ten years, 67% of homeowners in their 50s and 60s are now carrying mortgage debt well past the age of 70. *

Financial planners are divided on whether it’s a good idea to try to pay down your mortgage as soon as possible. There are those who say that it may be a disadvantage to lose the mortgage interest deduction. The reality is, however, that many retirees don’t have enough personal deductions to be able to use their mortgage deduction with most only qualifying for the standard deduction. Also, if you enter retirement with 10 or 20 years paid on your mortgage, the interest portion has declined to the extent that it’s not generating enough of a deduction for many people.

The answer is, yes, you should try to pay down your mortgage by making extra principal payments when you can. The alternative, which is becoming more of preference for an increasing number of retirees, is to simply downsize and sell your home and apply the equity to a more affordable living space.

Do I save for retirement or pay down credit card debt?

Sadly, this is turning into a classic dilemma faced by a majority of Americans. Unquestionably, you should try to pay off all high interest debt before retirement. If your retirement assets are earning less than 6% a year, even 9% credit card debt will cost you vital cash flow. This is the time to get deadly serious about your credit card debt. Every penny you are paying towards debt needs to go towards your financial security, so you can’t begin implementing your debt payoff plan soon enough:

  • Get on a budget: Set a monthly target for debt payments (and make it a stretch goal) and then budget everything else around that. Eliminate non-essential expenditures. Find ways to stretch your essential expenditures. Downsize your lifestyle now. Your goal should be to pay off your debt completely within a year. Oh, and STOP USING YOUR CREDIT CARD!
  • Pay off smaller balances first: It’s easier and more motivating to check off the smaller targets first. It will help you build momentum as you tackle the bigger ones.
  • De-clutter: It’s probably time to get rid of a lot of stuff anyway. You can raise more money than you think by getting rid of clothes, appliances, old cell phones, CDs, furniture and half the stuff in your garage by putting it all up for sale on E Bay.
  • Save any excess cash flow: If you find ways to generate additional income it should be applied to savings. As soon as you reach your debt pay off goal, apply the budgeted debt payment to savings and don’t look back.

Should I just continue working or should I try to earn an income in retirement?

Recent retirees and Boomer pre-retirees have actually begun to forge a new normal for retirement by preparing for a new career well before their retirement date. Some have created a 'transitional' relationship with their employer, scaling back hours or changing their status to 'consultant.' Such arrangements can sometimes extend the working relationship with an employer. Some are branching out to start a business of their own or monetizing a hobby. Many boomers are already planning their new careers by hitting the books and learning new skills.

The prevailing attitude among a growing number of pre-retirees is that they aren’t going to limit themselves by trading a life of work for a life of leisure; rather they are going to take control and trade in work that they no longer want to do, for work they will really like to do. By taking control of their new working life, they are more likely to be able to find an enjoyable balance of work and lifestyle that will sustain them financially, mentally, and psychologically.

*Retirement time bomb: Mortgage debt. Securian research reveals growing burden for boomers and retirees – April 2013

Tags: reduce debt, debt, retirement

How to Choose the Right Investment Advisor

How to Choose the Right Investment Advisor

Apr 2021

With the proliferation of investment and personal finance websites, investors have access to a boundless number of resources and tools once only available to financial professionals. And, while an increasing number of investors consider themselves to be at least somewhat selfdirected in their investment decisions, the ever-expanding world of investments and the increasing complexity of the financial markets require much more than a part-time approach to planning. With so much at stake, it would be important to seek the guidance of a qualified and trusted investment advisor, if for no other reason than to validate their own plans and decisions. Choosing the right investment advisor can, therefore, be one of the more critical decisions a physician makes.

When looking for any professional advisor, it is important to be able to match their characteristics, temperament, client profile and experience level to your own profile. In the case of an investment advisor, the more you know about your financial situation, your investment objectives and preferences, and your tolerance for risk, the more thoroughly you will be able to evaluate an investment advisor to determine if they are a match. Before meeting with an investment advisor, conduct a thorough assessment of your current situation and establish clearly defined goals and objectives.

Who Does the Advisor Work For?

Advisor or Salesperson: With hundreds of thousands of individuals calling themselves 'financial advisor' or 'wealth manager' or 'investment specialist', the challenge for investors is to wade through the marketing and advertising to be able to identify those financial professionals who truly put their client’s interests first. The financial services arena is vast and very fragmented among a number of different types of advisory models. Many advisor-types work for a financial institution, such as a bank, a stockbrokerage firm or an independent broker-dealer and are paid by their company to sell certain products and service. Other advisors have no allegiance to a company and are paid directly by their clients. Investors need to be able to determine which type of advisor is most likely to provide conflict-free investment advice.

Should You Pay Commissions of Fees?

Advisors who work for an investment firm or a bank may earn their income primarily through commissions paid by their company that generates its revenue from the sale of products and services. The more products an advisor sells, the more income he or she earns, and the more revenue the company generates. While these advisors must adhere to certain standards of 'suitability' when recommending investment products, they are not always required to place their client’s interests first as the “fiduciary standard” requires. Although most of these advisors have the best intentions of doing what’s right for their clients, they may come under pressure from their firms to produce a certain amount of revenue. This can be conflicting for advisors and drive them to recommend products that they otherwise wouldn’t in particular situations.

At the other end of the spectrum are advisors whose sole source of income are fees paid to them directly by their clients. In this way, advisors are not beholden to a particular firm or any particular investment products. They can search through an array of financial products to find the ones that are most appropriate for their clients. Because they don’t receive any commissions or fees from product sales, they can be completely objective in their advice.

Professional Guidance or Sales Process

Both commission-based advisors and fee-only advisors work with their clients through some sort of investment planning. Investors should never consider a recommendation unless their advisor has worked through the process of thoroughly understanding their financial situation, specific objectives, and conducting a thorough risk assessment. Investors need to be able to discern whether the analysis performed by their advisor is truly a financial map for achieving their objectives or simply a justification for a product recommendation. One key test would be to ask your advisor after a product has been recommended whether there is an equivalent investment product available that has fewer expenses or smaller fees. If they say no or hesitate, you may be in front of a product salesperson.

Background and Experience

It is important to treat the selection of an investment advisor much like the hiring of an employee. The right kind of advisor does work for you. Because your financial future is at stake, you need to ensure your advisor possesses a solid background and substantial experience for working with people in your specific situation. Their background should be completely void of any disciplinary actions by the regulators (check the FINRA broker-check website), and it should include progressive educational and industry accomplishments to demonstrate their commitment to their profession. Look for professional designations such as CFP®, ChFC, MFS, CFA as indications of their commitment to knowledge and ethical practices.

Advisors who have not experienced at least one complete investment or financial market cycle (generally, about five years) may not be seasoned enough. The more experience the better as long as it has been gathered working with people in situations similar to yours.

6 Types of Investment Risk and Strategies

6 Types of Investment Risk and Strategies

Apr 2021

We’d all love to reap the rewards of high returns on our investments without risk. But unfortunately, wishing does not make it so. Like it or not, risk is part of the equation if you’re aiming for anything other than preservation of capital — a risky goal in and of itself, since the buying power of your money will slowly erode over time if you don’t outpace inflation. The good news is that there are many ways to manage different types of investment risks.

  1. Market RiskStock prices rise and fall over time, sometimes dramatically. While this can be thrilling in the case of a run up, it can be stomach churning when prices fall precipitously. Other asset classes are not immune to market risk as the price of bonds, real estate, gold and other commodities can fluctuate as well. However, diversification among stocks, bonds and other asset classes can help balance market risk. Losses on paper are realized only when you actually sell, so take steps to avoid being forced into selling into a down market. Adjusting allocations as you approach retirement or any other need for divestment is another way you can potentially reduce the impact of market risk.
  2. Inflation Risk.As alluded to earlier, inflation can eat away your purchasing power over time. Today, many savings accounts don’t even keep pace with inflation — meaning a negative real rate of return on your money. Additionally, while higher inflation generally goes hand-in-hand with more favorable savings account rates, if your money is locked up in a lower-interest/longerterm CD as rates climb, you can fall prey to the deleterious effect of inflation. Ironically, in this case, risk can potentially help offset risk as often the only way to outpace inflation involves taking on higher risk through greater exposure to equities (and subsequent market risk).
  3. Mortality RiskThere are really two types of mortality risk. One is not living long enough, and the other is living longer than you expect (yes, this can actually present a problem despite the obvious benefits). In the case of annuities, there’s the possibility that you don’t live long enough for your premium payments to be worthwhile. For the risk of greater-than-expected longevity, proper planning can go a long way. Target date funds, where assets are rebalanced periodically according to a specific retirement goal date, strive to keep your portfolio appropriately positioned as you approach retirement and can potentially help manage the risk of losses associated with an untimely exit from the market. The principal value of a target date fund is not guaranteed at any time, including at the target date.
  4. Interest Rate Risk.The Federal Reserve recently raised interest rates (the principal value of a target date fund is not guaranteed at any time, including at the target date) for the second time this year and signaled two more increases were coming. While this most recent move wasn’t a surprise, it’s expected to impact investors and many individuals who carry debt. New and adjustable rate mortgages are predicted to rise along with credit card rates. This move by the Fed will also likely affect bond prices negatively. Maintaining a portfolio that includes investments that typically benefit in a rising interest rate climate and avoiding excessive exposure to longer term fixed-rate bonds are both strategies to help manage this type of investment risk.
  5. Liquidity Risk.Liquidity, or having immediate access to funds, is an important aspect of investment planning. You never want to be in a position where the need to withdraw funds forces you to incur losses or other penalties. An emergency fund is a good example of the need for liquidity since you never know exactly when disaster may strike. This risk can be mitigated through thoughtful asset allocation that maintains an appropriate cash position at all times.
  6. Inertia Risk.This is the risk of doing nothing. And it’s particularly detrimental for younger investors who may benefit most from the effects of compounding. The earlier you start saving, the better your chances of positioning yourself for a comfortable retirement. So especially if you’re young and haven’t already started contributing to your 401(k), the time to start is now

  7. Be aware of risk when in comes to your investments, but there’s no need to be terrified. There are many ways to manage investment risk so you have the potential to grow your nest egg with confidence. Schedule a meeting with your 401(k) advisor to discuss how to address risk to your portfolio so you can pursue the retirement of your dreams.

Disclaimer: Investing involves risk, including possible loss of principal. No strategy assures success or protects against loss.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Asset allocation and diversification do not protect against market risk. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.

The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.

Investing in real estate involves special risks such as potential illiquidity and may not be suitable for all investors

CDs are FDIC insured to specific limits and offer a fixed rate of return if held to maturity. Annuities are not FDIC insured. Annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Withdrawals made prior to age 59 ½ are subject to 10% IRS penalty tax. Surrender charges apply. Guarantees are based on the claims paying ability of the issuing insurance company.

The opinions voice in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult an advisor prior to investing.

Resources:

https://www.nytimes.com/2018/06/13/us/politics/federal-reserve-raises-interest-rates.html

Tags: investments, managing investments, retirement

Planning for the New Normal Retirement

Planning for the New Normal Retirement

Apr 2021

The need for retirement planning didn’t really exist until well into the 1970s. Up to that point, people worked until age 65, spent a few years in leisure through their life expectancy which was about 69. Many retirees of that era were able to coast into retirement with a cushy pension plan. Over the next few decades, as life expectancy continued to expand, as did the number of years in retirement, financial planners came up with simple rules of thumb for determining how much a person would need at retirement in order to maintain his or her lifestyle.

That’s where the 70 percent rule came from. People were told that they would only need 70 to 80 percent of their pre-retirement income to preserve their lifestyle throughout their golden years. While that may have worked for retirees back in the 1970s and 80s, it could spell disaster for today’s retirees.

It’s not your Grandfather’s Retirement Anymore -Today’s retirees face a whole new set of financial challenges. Many are carrying mortgages and other debt into retirement. Health costs have increased nearly ten-fold. And, because we are living longer these days, health care costs will consume an increasing piece of the retirement budget. About 50 percent of today’s retirees find themselves sandwiched between their own kids, who may still be in college, or struggling to break free of the nest – and their aging parents who may require assistance in their daily living. Some retirees are actually finding that their retirement income needs may be as much as 110 percent of their pre-retirement needs. So much for the rules-of-thumb.

Better to Manage your Risks than your Investments -Today’s retirement savers are finding that there are no certainties in the markets, or in the economy. The only certainties that do exist are the risks they face leading up to and all the way through retirement. The two biggest risks all retirees must confront are longevity risk and inflation risk. Unlike market risk, which can be avoided by simply taking your money out of the market, these two risks are inescapable. And, most people are either unaware of these risks, or have not fully grasped their significance in planning. It seems like decades ago that we experienced any real inflation. And, it has only been in the last couple of decades that the life expectancy rates have been accelerating.

For today’s retirees, longevity risk is a new phenomenon. While people may understand that they can expect to live longer, few realize that age longevity is constantly expanding, meaning that the higher your attainted age, the greater your life expectancy. The risk of longevity is further compounded by the risk of inflation. Even at an average inflation rate of 3 percent, the cost of living will double in 20 years which could put many retirees’ life style in jeopardy.

Retirement as a New Life Cycle -For this reason, most retirees are viewing their golden years not as retirement, but as a new life phase in which earnings from some form of employment or a business may be a necessity. But who says that is a bad thing? Many people can’t imagine themselves coasting through 30 years of life without being able to apply their skills or knowledge in a meaningful way. For many, it is an opportunity to regenerate themselves through new opportunities and new knowledge. Instead of an ending phase of life, retirement will be looked upon as a new life cycle in and of itself.

The prevailing attitude among a growing number of pre-retirees is that they aren’t going to limit themselves by trading a life of work for a life of leisure; rather they are going to take control and trade in work that they no longer want to do, for work they will really like to do.

Today’s retirees are finding that retirement requires at least as much psychological and emotional preparation as it does financial preparation. So, retirement planning needs to include a thorough assessment of human assets and liabilities along with an assessment of financial assets and liabilities. It is no longer enough for retirees to know how much money they will need to live; they need to know how they will be able to make the most of this new life stage.

By focusing primarily on financial issues, traditional planning reduces retirement to an economic event with its financial objectives marked by a finish line. The dangerous misconception it perpetuates is that, if you hit the finish line, on time and on goal, your planning is done and you’ll have a successful retirement. While it may address the financial goal of creating a sufficient standard of living, it doesn’t address the larger, more important issue of the quality of life.

Tags: education, retirement planning, tax planning

Tags: investments, managing investments, retirement


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