Schulfer & Associates, LLC

Retirement Planning Advice: Work to eliminate your Debt

I explain to my clients that building a secure retirement plan is an equation. From a high level, that equation includes formulating an income plan and coordinating that with your spending plan. We identify your needed income (housing, food, taxes, healthcare, debt payments, etc.), plus your wanted income (non-essentials, AKA fun things!) and match that up with your income sources such as social security, pensions and reliable income from your retirement accounts and personal assets. The concept is simple, but retirement planning is more complex and as we dig into the details, many questions arise.
Demographically, our clients tend to be within a few years of retirement or are already retired. Most have either built a sizeable nest egg or are actively building their net worth. If I could give a piece of advice to individuals and couples who are a few steps from that point in their lives it would, of course, be to save more and don’t spend money that you don’t have.
I’ve always been a promoter of debt control and reduction. Understandably, there are times in life that debt is a tool. I don’t know of anyone who waited to buy their first house until they saved enough to pay cash. Student loans or business debt can be essential to get a career off the ground. Then again, debt can be a trap. Credit card debt, car payments and other personal loans are a weight that debtholders carry around. Even high income earners with a lot of loans feel like slaves to their debt. Likewise, retirement planning is much easier and far more comfortable with less or even no debt in our equation.
So, here is some advice to help to control and ultimately eliminate your debt
Organize your debt. Sometimes debt payments just become part of the chaos of life. Organize your finances by making a list of your debts including the principal owed, the interest rate you are paying, whether or not that interest is tax deductible, the monthly payment and expected payoff date if you remain on your current payment schedule.
Make a debt elimination plan. Pay off your highest interest rate debt first (remember to factor in whether the interest is tax deductible and calculate your effective rate). Make extra payments toward your principal on your highest interest rate debt. Then, “rolldown” by taking the amount you were paying on the now paid off debt and fully add it to the payment of your next highest interest rate debt until it is paid off. Continue the rolldown strategy until all of your desired debts are paid off.
Control your debt. Only spend money that you have, especially on non-essentials. Save it before you spend it. It’s a discipline that becomes a habit then a way of life if you stick to it.
Formulate a spending plan. Spend according to what your income could be versus what is currently is. For example, what if you were to take a 25% cut in pay? Could you stay on your current spending plan? Almost 22 years ago, when Gene and I first got married, we applied my entire paycheck toward the principal balance of our mortgage (which we were paying 7.5% interest on at the time) and channeled money into savings. We wanted to be accustomed to living life on one paycheck should we ever decide voluntarily to do that, or even be forced to do so if either of us lost our jobs or could no longer work. It was an effective strategy to reduce debt and build savings fast and we managed to live a great life without spending a lot of money. Whatever works for you, find a way to formulate and stick to a spending plan.
The discipline of controlling your debt and the efforts to eliminate it become fun when you track your progress. Set a goal. Chart your net worth (assets [what you own] – liabilities [what you owe] = net worth). Compare your progress to the step above where you identified your payoff dates without a debt elimination plan.
How will it feel when you are debt free? One thing I know for sure, someday it will make retirement planning much easier for you and for your advisor.
(Author’s note: Due to industry regulations, I am prohibited from responding to any online comments. I welcome you to contact me via e-mail: louann.schulfer@lpl.com).
LouAnn Schulfer is co-owner of Schulfer & Associates, LLC Financial Professionals and can be reached at (715) 343-9600 or louann.schulfer@lpl.com. www.SchulferAndAssociates.com
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. Accredited Wealth Management Advisor SM and AWMA® are trademarks or registered service marks of the College for Financial Planning in the United States and/or other countries. The Accredited Investment Fiduciary® designation is earned through the Center for Fiduciary Studies.