How to Manage Debt in Your 50s
Your 50s are an important time to focus on long-term financial planning and to make a push towards putting yourself in the best financial position possible.
So where does debt fit into the picture?
A common situation
Take Nancy and John, who are both in their mid-50s. They’ve been consistently setting money aside in their 401(k)s and are on their way towards having a reasonable nest egg by the time they retire. Nancy and Ted own their home with 15 years remaining on their mortgage and about $8,000 in credit card debt.
Concerns about whether they’ll really have enough money to retire brought them to Vitucci & Associates. Nancy and John are trying to decide how to manage their debt and savings decisions – should they add more to their 401(k)s or stop saving until their credit cards are paid off? What about the cost of college for their teenagers? Balancing debt and savings
Even when people in their mid-50s have built a solid savings habit, many still carry some form of debt – and many are also staring down the potential of costly out-of-pocket costs (or even student loans) for their children.
Balancing these competing priorities isn’t a simple issue: that’s why many pre-retirees decide to seek help from an advisor.
If you’re trying to decide what to do, start by considering these important factors:
- Your current savings strategy and retirement account balance. How much are you on track to have for retirement (make sure to include a margin of error)? How does that align with your expected needs in retirement?
- Your total debt and interest rate expenses. The higher – and more volatile – the interest rate, the more likely you’ll need to address the debt sooner rather than later.
- Your investment strategy and expected rate of return. For some low-interest debts, like a mortgage, it can make more sense to put money towards savings instead of paying down debt – especially if your expected returns on your investments are higher.
How these factors balance for you and impact your debt payment versus savings needs is highly personal. Make sure to consider them within the total scope of your financial picture.
Nancy and John came to the conclusion that their credit card debt was sufficiently expensive that it made sense to tackle it right away. Their Vitucci advisor suggested calling the credit card company to ask for a lower interest rate while they paid it down, and they easily got one due to their excellent payment history. This reduced the cost of the debt and made it easier to pay off more rapidly – with just a modest bump in their monthly payment.
From there, we did an estimate of their long-term progress towards retirement and found that prioritizing additional savings would be very useful. Nancy and John reviewed their budget, made some changes, and put more money towards their workplace 401(k)s.
The biggest mistake you can make in these decisions is not having a clear long-term plan. This might manifest itself by just sticking with your plan’s default 401(k) deferral and investment options, or just making the minimum payments on your credit cards. Alternatively, you might be responding to priorities instead of making them – for example, getting a credit card bill and deciding it needs to be paid down ASAP.
Whatever you end up doing next, make sure you’ve sat down, run through the options, identified the costs and benefits, and built a real strategy.
There is often more than one way to accomplish the same goal – and for a given individual some ways might be better than others. But a surefire way to end up with an ineffective strategy is to mistake the trees for the forest, or to just go along with the status quo. Really think through your goals, your risks, and the realities of your financial life.
The second mistake is not differentiating between different kinds of debt and different types of risk. Carrying credit card debt in retirement is far more costly and risky than carrying a mortgage, just as the risks of variable-interest loans are different than the risks from fixed-interest loans.
Be sure to separate these out before you start planning: while carrying a mortgage in retirement might still be a risk for you it’s important to assess that mortgage on its own merits and in the context of your life. Similarly, based on your specific financial situation you may be more susceptible to certain risks, like rising interest rates or volatile investment returns, than your neighbor.
For example, Nancy and John will be heavily reliant on their retirement savings and Social Security for their retirement income. That means their savings balance at retirement and their asset allocation in retirement will make a very big difference to their overall quality of life.
That’s why their Vitucci advisor encouraged Nancy and John to do everything they can to maximize their contributions now, while they’re still working.
A commonly overlooked risk: Our desire to help our kids
Nancy and John’s situation also involved a serious discussion of what would be feasible in terms of their kids’ college educations.
Like most parents, Nancy and John are very involved in their kids’ lives and want to give them the best. But the potential risks they face in retirement are very real, and after much discussion we determined that they’d do well to put limits on their contributions and to start thinking about other ways to finance higher education.
Today, both teens are working hard to build eligibility for merit scholarships, and they’re also researching in-state and local college options to reduce the total cost of their educations. Nany and John have spoken to the kids about the pros and cons of taking on student loans, as well as the potential need to work throughout school.
For many parents in their 50s, this careful balance between retirement and college represents a serious risk.
It’s never easy to think that you can’t give your kids everything they need, especially when you see them working so hard to make it to a great school. But building your own independence is just as critical: as they say, there are no student loans for retirement.
That’s why it’s so important to take a serious and honest look at your retirement plans, your savings strategy, and your debt reality before turning to the question of a college education.
Take the next step
There’s a lot more to retirement planning than debt and savings: ideally, you’ll have developed a financial plan in your 50s that can see you through your last day of work – and well beyond it. To get started in building your own personal retirement strategy, download our free guide to retirement planning in your 50s.
It’ll help you see the big issues, the major risks, and how to develop a plan for lasting financial independence.
Retirement: Are You Ready?
The 50+ Retirement Plan Guide