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Debt and Retirement - How to Handle both when Nearing Retirement

Debt and Retirement - How to Handle both when Nearing Retirement

Sep 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

Sep 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

Sep 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


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