The Student Loan Financial Discussion


Did you know that the total amount of student loans held by Americans is larger than that of credit card debt? That may be a bit surprising to some. While I am well aware that most of my clients and readers of this blog are beyond their student years and probably paid off their student loan debts years ago, it’s still worth talking a bit about as the topic has become relevant over the past few years, particularly during the recent election season. There has been a lot of discussion centering around how much student loan debt has impacted the spending habits of younger generations and possibly hindered their interest in buying homes and starting families, as well as spending on big ticket items in general. Heck, there’s a really good chance that you have a child or grandchild currently paying off students debts, so for some of my readers it might just be a personal topic. Ideally, those younger generations would find jobs that pay enough to efficiently pay down those debts and allow them to save up for those big “adult” purchases (i.e. a car, a house, etc.). However, more often than not and for a number of different reasons, that is not the case. So, what does this have to do with you and your financial/retirement planning? Well, probably nothing, but it is worth noting. Furthermore, it may have long-term impacts such as slower economic growth as fewer younger people are spending on the large ticket items that can help fuel booms. Furthermore, if you have kids and grandkids weighed down by student debt, you may want to talk with them about their situation and educate them about what they can do to better their situations. Maybe they need a second job or maybe they need some guidance on smart spending habits. Whatever it is, don’t be afraid to help them get on the right path. Also, if you were planning on relying on your children to help with your retirement, such as moving in with them or having them pay for some of your needs, you may want to know whether their student loan debt early in their adult lives may have long term impacts (i.e. they aren’t able to save enough for the future). Lastly, if you are a retiree considering going back to school–and yes, they do exist–you will want to know whether taking on any student loan debt is doable. Obviously, you really only want to go back if you can do so without taking out any loans, but if you can do so for a small amount, it may be worth considering. Again, while you may not be directly impacted by student loans, it may have a long-term impact on the economy that affects your portfolio and investments, especially if it takes markets and the economy longer to recover from downturns due to enough people not spending. So, what do you know about the student debt situation and does it impact you?

Is Debt Really a Bad Thing in Retirement?

When it comes to carrying debt into retirement, most financial advisors or wealth managers will probably encourage you to pay down as much of it as possible before you stop working. The biggest reason being that you don’t want to use your retirement savings to have to pay down those debts. While I encourage my clients to pay down their debts–such as mortgages or student loans–before retirement, I realize there may be rare instances where debt might not be such a bad thing. Yes, there may be times when loans and debts may actually be a good thing for certain individuals closing out there careers and living out their retirement years. One reason why debt may not be bad is the current low interests rates, which means that borrowing now may be much more economical than in the future. For those who follow the Fed and the economy, you know that interests rates are at incredible lows at this time, so if you want to borrow, now is a great time to do so. Furthermore, if you are financially responsible and disciplined, then you can probably handle taking some debt with you into retirement. You just need to make sure you will have enough saved up to cover the loan payments without hurting your retirement plans. Now, I do not encourage everyone to take some debt with them into retirement and even those that do, I encourage them to pay off as much of it as possible before actually retiring. If you are not very good with balancing your finances or making payments on time or don’t have a large retirement account, then you want to definitely avoid bringing debt into retirement. In fact, if you are this type of person, I would encourage you to keep working until you pay off your debts before you actually retire. If you have questions about your retirement plans and your finances heading into retirement, you should talk with a certified financial planner or wealth manager.

Is Your Retirement Nest Egg Safe From Creditors?

Unless you have a job that pays extreme well, chances are you will take on some debt at some point. That could be in the form of a mortgage or maybe it’s student loans. Regardless of what type of debt you take on, you will need to pay it off, which is where the risk lies. If you default on those loans, the creditor will come after you and, depending on the terms of the loan, that can be quite rough. Keep in mind that many creditors don’t really care about your situation, they just want their money and will take whatever legal steps are necessary to get it. Carrying debt can be stressful and it can be even more so in retirement, where chances are you will not have income coming in that you can put towards the debt. If you plan on bringing some debt into retirement with you–such as a mortgage or credit card debt–it might be a good idea to understand how a default might effect your retirement savings or nest egg. While I strongly discourage bringing any debt with you into retirement, there is good news, many retirement accounts are protected from creditors. For example, most employer retirement accounts, such as a 401(k) are protected from creditors as mandated by federal law. IRAs are also federally protected, but only up to a certain amount (I believe it is around $1.3 million). There are also various state laws that may provide further protections for IRAs depending on the creditor. By sharing this, I am not encouraging you to take on debt in retirement, but rather sharing info with you so that you won’t stress out too much if you have to take on some debt after you stop working. Now, if you’re financially responsible and have planned in advance for any debt you may take with you into retirement, then you’ve probably saved enough to cover that debt. Either that, or you have a plan in place to pay it off. Are you planning on having debt in retirement?

Taking Advantage of the Retirement Sweet Spot

As you move through your career towards retirement, you will inevitably spend time planning for the future. As part of that planning, you should make sure to take advantage of the IRA “sweet spot” that exists between ages 59 1/2 and 70 1/2. What makes that time period so sweet? Well, for starters, you can start taking distributions from your IRA and not get hit with a early distribution penalty. Now, you will have to pay taxes on that money, but nothing more. You are not required to take money out during that period, but it’s an option. It’s also a great time to consider converting a traditional IRA–if you have one–into a Roth IRA, which can give you even more control over your retirement funds. Remember, a Roth IRA does not come with required minimum distributions (RMDs), which means you don’t have to start taking money out when you reach age 70 1/2. Your time in the sweet spot can be a great time to put your retirement plans into action or form more detailed versions of your plans. You can start setting yourself up to be a part of a lower tax bracket in retirement by lessening your nest egg by taking money out during the sweet spot period. It’s also a good time to take care of any preliminary costs that you may have in retirement. For example, if you plan on moving for retirement or buying a summer home, that sweet spot time can be a great chance to make that new purchase or prepare your finances to do so once you reach retirement. You can also use that time to pay down debts so that you don’t have to worry about them once you do retire. Regardless of what you decide to do, you should speak with a certified financial planner before you make any decisions during this period as they can help you make the most of it. Are you planning to take advantage of your pre-retirement “sweet spot”?

“Rightsizing” Retirement

Do you see yourself staying in your current house in retirement? It’s not uncommon for retirees to seek to downsize during retirement. Reasons for doing so often focus on cutting costs, reducing maintenance work, and relocation a different locale or region. Furthermore, it can be tempting to use the profit from a home sale–especially if you live in a seller’s market–to pay down debts or add a boost to your retirement savings. For example, for an empty nester couple with a 2,500-square-foot house and a mortgage to pay off, the profits from the sale could go a long way towards paying off all or most of that mortgage and possibly still leave enough to help with the purchase of a smaller home. If you don’t have a mortgage, that profit could go towards funding your retirement plans (i.e. travel) or help to provide a cushion for your savings. For those looking to sell and use the profit to pay down debt or fund retirement, it’s not really downsizing, but rather, “rightsizing”. Aside from freeing you from the financial restraints of a large home, rightsizing can also help you to de-clutter your lifestyle and get rid of things (i.e. old furniture, clothes, etc.) that you no longer need or want. Rightsizing can also serve as a chance to refresh your lifestyle and inject new energy into your life, especially if you are moving to a new location. Also, rightsizing doesn’t need to be done right when you enter retirement, but can be done anytime after you retire. Is rightsizing right for you?

Get Down: Paying Down Debts Before Retirement

For many Americans, retirement is lived on a fixed income. That is, there is no income coming in and they are living off their savings. This means you will need to be realistic about your expenses and live within your means. While planning for retirement, aside from thinking about your expenses, you will also need to consider any debts you will have heading into retirement and what steps you can take to pay down those debts as much as possible. The key is that you enter retirement with as little debt as possible so that you don’t have to use your retirement savings to make payments on the debts. You want to retirement savings to fund¬†your retirement and not go towards debt payments. Some types of debt you will want to consider paying down include mortgages, student loans, and car payments. Regardless of whether you are decades out from retirement or only a few years away, you may want to start by first assembling a list of your debts so that you can have an idea as to how much you owe. You will also want to consider any future debts you may have. Do you see yourself taking out a mortgage? Will you need to buy a new car before retirement? Will your children be paying down their student loans by themselves or will be helping them? You may also want to prioritize your loans. While it’s important that you pay off all your loans, you may want to consider giving priority to your largest loans or focus on paying off loans that are close to being finished by putting a few extra dollars towards the payments. Taking these steps to organize your debts will allow you to be efficient with with your money as you pay off the loans. If you need help with organizing your debts or discussing how your debts may affect your retirement savings, you should speak with a certified financial planner.

The Importance of Hitting Retirement Debt Free

You’ve probably heard experts say it before, but you should really work to pay off as much of your debt–especially the big debts–before you hit retirement. Such big debts can include a mortgage, student loans, or credit card debt. While you may not be able to pay it off completely, you will want to pay down as much of those types of debt as possible as they can be less forgiving and harder to adjust once you retire. Remember, once you hit retirement, you won’t have much–if any–earned income and may have to make some harsh adjustments to keep making debt payments. However, if you are savvy with your retirement planning, you may be able to build your debt into your plans. If you intend to have your debt repayment last into retirement, you should be able to calculate what your payments will be and make sure you have enough saved to both live a comfortable retirement and continue to make payments. Ideally, though, you want no debt heading into retirement, which may require tightening your belt in the years leading up to retirement so that you can pay off as much as possible. Paying off your debt will allow you to better enjoy retirement and not have to worry about whether you will have enough saved to both live comfortably as well as keep paying down your debts. If you need help setting a plan to pay down your debt, you should talk with a certified financial planner.

Protect Yourself: Don’t Let One Thing Bring You Down Financially

All it takes is one emergency or unexpected market glitch to derail your finances. It’s also highly unlikely that you will even see it coming. So, what can you do to make sure such a situation doesn’t ruin your finances and your retirement goals? There are a few steps you can take, most of which I have discussed at some point or other on this blog. First off, you need to make sure your portfolio is diversified, that includes both in assets as well as investment strategies. Remember, diversification is the most effective way to manage risk and can be done in many different ways. Another important step in avoiding a single point of financial failure is to control your debt and pay it down as much and as efficiently as possible. The next part of protecting yourself financially is to save as much as you can. Having savings can allow you leeway should an emergency occur and can help you to remain financially independent in such a situation. Finally you will want to have a financial backstop or back-up to help you during a true emergency. This is where a credit card can come in handy or a loan. This can be tricky as it’s important to maintain the ability to secure a loan, but you also shouldn’t take advantage of such offerings unless you really need to. If you have questions about how to protect yourself financially, you should speak with a certified financial planner who can help you build up your finances in a way that provides protection from emergencies and sudden expenses.