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?
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.
I cannot predict the future, but I am very, very comfortable in saying that retirement will be different for future generations that it is for current retirees (and those about to retire). As to how different, I don’t know, but as with many things, it will change with each future generation as it has for past generations. Not only will retirement itself be redefined, but so too will the ways that people save for retirement. It’s already happening. For example, younger generations today have extensive resources and opportunities available to save for retirement, but they are also looking at longer careers and a delayed start to retirement savings thanks to student debt and an unpredictable economy. Their version of what retirement will be like is much different from those of their parents. This is important to keep in mind when you discuss retirement saving with younger generations, such as your children or grandchildren. It can be easy to get lost in the notion that younger generations can pull off retirement just as you and your parents might have with a little hard work and saving. However, that just won’t work. Instead, remember to talk with younger generations about how they view retirement and try to understand why they might view it that way. For those just starting out in the working world, retirement can seem a long way away and saving for something so far in the future may not take top priority compared to paying down student loans or getting a solid financial start to adulthood. If your children are in their 30s or 40s, possibly with a family of their own, they may not feel that they will ever be able to retire given the unpredictability of the economy and the cost of things such as homeownership and still having to pay down student debts. Taking the time to understand the situation of younger generations is important to having a meaningful conversation about saving for retirement and financial stability.
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.