Get On The Path To a Debt Free Retirement
I can't stress enough how important it is to retire with no debt. First, it gives you tremendous peace of mind. And second, it significantly raises the odds that you won't outlive your money.
The last few years have been brutal for retired investors. Stocks have tanked and interest rates are again at all time lows. But retirees with no debt can generally weather the storm.
When markets fall, these retirees cut back on their spending. And with no debt, they have the flexibility to do it. I work with many retirees who have gotten through the last few years by following this simple strategy.
The retirees who are having the toughest time today are those with debt. Because the debt payments don't go down when the markets do, they're stuck paying the bank before they can pay themselves.
That isn't fun. Their banker gets to go on vacation, while they struggle to pay the utility bills. Don't put yourself in this position.
When you retire, you have to live off the returns from your investments. Sounds obvious, but most people fail to comprehend what this means.
It means your income will go up and down with the markets. The up years, of course, aren't the problem -- it's the down years that can destroy your retirement security.
In retirement, a good rule of thumb is to anticipate income declines of 20-25 percent in bad markets. This means that if you were planning to live on $80,000 a year, you've got to be prepared to live on $60,000 in a tough economy.
Why does this happen? Because as a retired investor your prospects for income will generally get hit from two fronts.
- Interest rates are likely to fall in response to the bad economy. This means you can't generate as much income from your investments. For instance, rates on short term money have fallen from about five percent to almost zero in this crisis.
- The stock market usually declines, which means you probably won't have any capital gains to help meet your living expenses.
If you want to estimate how much it would cost you on a monthly basis to get your debts paid off before you retire, go to www.dinkytown.net and play around with the loan calculators. Start by paying off the higher interest rate loans first, and then work through the lower rate loans.
Bottom line: You need to put yourself on the path to a debt free retirement. No debt gives you the flexibility to deal with the inherent volatility of your retirement income. If you can't cut back on your spending in tough markets, you can burn through a lifetime's worth of savings a lot faster than you ever thought.
Debt perception image via Flickr user ♥ Morning Glory ♥, CC 2.0
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