It can be tempting to look at your nest egg and see an untapped source of money, particularly if your nest egg is sizeable and you are nearing retirement. For example, maybe you found your dream retirement home and need money for a down payment. You may look to your IRA for a short-term loan to meet those money requirements. I’m here to tell you that that is a bad idea and to discourage you not to do so. The biggest reason being that you don’t want to tap into your IRA monies until you actually retire and, even then, you will want to have a plan for doing so. You’ve worked hard to save up for your post-work life and you want to make sure that money goes towards your retirement goals (of course, if purchasing a retirement home is part of your plan, then that’s a different discussion). The other risk of viewing your IRA as a loan source is the risk of making a mistake when taking out money. Keep in mind that there are two routes you can go when taking money out of your IRA before reaching retirement age. First off, you can take a distribution, pay the taxes and penalties, and then not have to worry about what you do with the money. The other option is to take out the money and do a 60 day rollover, which will involve paying back the money within that 60 day window. There’s a lot of risk involved with that. I repeat, there is a lot of risk involved with doing this. Mainly, if you take out the money, is there any guarantee that you will recoup it within that 60 day window? Chances are, you are going to be making a large purchase if you need a loan (probably talking thousands of dollars), so what are the chances that you will make that money back in two months? If you are certain that you can do that, then maybe you can consider it. However, if you aren’t so sure that you can complete such a transaction in that timeframe, stay away from this idea. That can lead to a lot of problems if you aren’t able to put the money back within those 60-days. Hint: Don’t open yourself up to the IRS taking more of your money through penalties! If you are in need of money, you should consider other types of loans or selling off other assets before even considering your IRA as a loan source. You may even want to really think about whether you even need to make the purchase at that time and whether you can put it off until you actually have the funds and leave your retirement money alone.
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.
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.
College is expense. As such, it can be tempting to help your children pay for it so that they are not burdened with huge amounts of debt when they graduate. However, before you do so, you need to strongly consider where the money that you will be helping them with will be coming from and whether that use of money can have an impact on your future. I want to be clear that I am not trying to dissuade you from helping your children, but I am reminding you to think about yourself and your future. A college education is a wonderful thing that can open many doors, but it is also a very expensive endeavor that can do a number on your future plans should you choose to fully fund it for your child (or children). This may sound odd to say, but this is an area in which you really should put your future needs above those of your children, especially if you find that can’t cover both retirement savings and a college education. Based on the cost of higher education today, it’s very common for students to take on at least some debt, so even if your child has to take on some loans, they’re not alone in doing so. Furthermore, you also don’t have to fund the entire educational experience. Setting a goal to pay for a portion of the education is very realistic and, most likely, more attainable that going after the whole thing. If you do want to help fund at least some of your child’s higher education, you would be wise to have multiple plans in place, both saving for the educational expenses as well as a wider-view plan that takes into account your retirement plans, your college savings plans, and your current financial situation. The key is to make sure that your goals are realistic and that you can meet them with your income and current financial situation. Meeting with a certified financial planner can be a great place to start such planning. Also, you should start saving for college costs as early as possible–preferably, when the child is born–so as to make the most of your money and time saving.
Saving for retirement isn’t easy. It can be tough to set aside money that you won’t touch for decades when you also have to make mortgage payments, save for a child’s education, make car payments, or take care of other financial obligations. On top of all that, the lifelines that past generations were able to rely on for retirement–such as Social Security and comfortable pensions–are either vanishing or a shell of what they once were. Thus, workers today must put away even more money for retirement on their own. With that in mind, it’s very important that you have an idea as to what debt you have and how you plan to manage it. Paying off debt leaves you with less expendable income available for saving. While debt is often unavoidable–between student loans and the cost of owning a home, few people can earn enough to cover it all–it’s impact on your financial life can be mitigated and controlled with a solid financial plan. You will need to track just how much you owe and what the terms are regarding that debt. You will also need to make sure you earn enough to make those debt payments on time as well as understand alternative payment plans should you find yourself in a tough spot regarding payments. If you need help forming such a financial plan, you should speak with a certified financial planner or specialist. Remember, debt is a part of life for many workers and it doesn’t have to derail your retirement or financial plans if taken on in a smart and well thought out manner.
If you’re years away from retirement and have temporarily fallen on hard times financially, it can be tempting to turn to your retirement savings as a way to make ends meet. After all, an IRA (or other retirement account) is often the largest asset one owns and such a large pool of money can be appetizing to an account owner in need of a short-term loan. While you can take a distribution from an IRA and then replace the funds with a 60-day rollover, such a move is discouraged because of the risk involved and the limitations. You are only allowed one 60-day rollover per 365 day period and you must make sure that you have enough money to replace the distribution within 60 days of taking it. Failure to obey such rules can open the IRA owner up to various penalties which can do serious damage to his/her retirement savings. Taking an early distribution from an IRA should only be a last minute, desperate maneuver. If you are considering such a move, you should speak with a certified financial planner to make sure there are not other, better options available.