People have different approaches to retirement savings and many of us spend a lifetime servicing debts and tackling many other problems little realizing that the neighbors may be leagues ahead of us in the retirement sweepstakes adopting simpler strategies.
Let’s assume (as an illustration) that we have two families living side by side in a small town and both are in their mid-fifties deep in discussion how they are going to plan their retirement. Couple B have worked out that over and above Social Security they will be required to mobilize at least $5,000 every month or $60,000 annually. This couple has a mortgage payment of $1,200 and $500 they pay for a car loan. If this couple withdraws at the rate of 4% annually, they will have to mobilize $60,000/ 0.04= $1.5 million as their retirement fund to survive.
As for couple A, they are in the same situation as couple B, the only difference being that they (A) have cleared all, repeat ALL, their debts. They took the pains to accelerate their mortgage repayment and saved a lot more to make a bigger down payment on their car loan which they finished paying faster. Couple A is required to pitch in only $3,000 per month and require only $1 million to survive in retirement simply because they happened to be debt free.
Why allow debts to hamper the cash flow in retirement?
From the example it is clear that carrying liabilities into retirement severely stresses your cash flow. Just as debt servicing in your working life severely constrained your ability to save for retirement, the same debts will reduce the amount you need to survive in retirement.
Mutually decide with your spouse that you will work jointly to accelerate home loan repayments and any other loan and attempt to liquidate all your dues so that you enter retirement debt free. This may involve many sacrifices in the short term that will make you live with much less than you are accustomed to but consider that as “rewarding” yourself for a brighter future.
Prepare a debt liquidation strategy without delay
Inventory all your liabilities big and small. Consolidate the small loans or unsecured liabilities. Try availing a short term loan like the loan for vehicle title. The cash loan for title helps you mobilize roughly 60% of your car resale value that adds up to quite a big sum, and all you need to provide is the collateral of your car pink slip. The car equity loan attracts interest of 25% APR. The pawn car title loan will make repayments painless through amortized installments. The sum that you raise through this pink slip loan will be immensely useful in clearing credit card outstandings that stress you the most. In return you can move into a low profile loan repayment that will not strain your income. For larger loans like mortgages consult your lender for refinancing options on favorable terms, especially lower interest rates.
Your home loan may be extracting $20,000 annually in interest payments. Uncle Sam saves you $5,000 in taxes when you avail the appropriate tax deduction. The moot question is why not liquidate the home loan itself and continue paying $5,000 in taxes while pocketing the difference amounting to $15,000? It’s ridiculous really, showing $20,000 in payments to save $5,000!
Clean up your debts and plan a better retirement saving
Once you accomplish your debt liquidation strategy and emerge debt free with better confidence, adopt a clear cut plan to augment savings so that you can accumulate the fund that will power a comfortable retirement. Remember the every dollar saved today is a dollar added and multiplied in an investment fund for tomorrow.