Cents and Sensibility
Cents and Sensibility
Take steps now to avoid
a heavy debt load
in retirementQuestion: I'm looking toward retirement but have concerns regarding meeting the payments on my liabilities. What steps should I take to handle this problem?
Answer: When you retire, the last thing you want to see is a heavy debt load. That's why you want to take action well before you retire. Unfortunately, for many seniors right now, debt is a big problem. How big? Consider this: Seniors filing for bankruptcy carry twice as much credit card debt as filers in their 40s, according to the American Bankruptcy Institute. And before they reach bankruptcy, more and more seniors are visiting credit counselors. Money Management International, a network of counseling agencies, reports that its 75-and-over client base rose 28 percent in 2002 over 2001.
What's behind these figures? Two of the chief culprits are the long bear market, which reduced seniors' retirement savings, and rising medical costs, particularly the escalating prices of prescription drugs.
Will conditions be different when you're retired? No one can predict the future, but one thing is certain: The more you do now to prepare yourself financially for retirement, the less you'll have to worry about debt when you get there.
Here are a few steps to consider:
>> Put a "price tag" on your retirement lifestyle. What do you plan on doing during retirement? Travel? Open a small business? Spend time with your family? Once you've articulated a retirement lifestyle, you can begin to estimate how much it will cost, and you can start making plans so that you won't get caught short.
>> Get the most out of your tax-advantaged retirement plans. To build the resources you need when you retire, you'll want to take full advantage of your tax-favored retirement plans, such as your IRA and 401(k). Contribute as much as you can afford to these plans - and keep in mind that you need your money to grow. Consequently, you'll want to have some exposure to stocks. While it's true that stock prices will always fluctuate, it's also a fact that, over the long term, stocks are the only asset class to significantly outpace inflation. As you get nearer to retirement, you may want to shift some - but certainly not all - of your investment dollars into income-producing vehicles.
>> Avoid overusing credit cards. Sometimes, you may need to use credit cards because you have no alternative. However, in many instances, paying with a credit card is just a habit - and it can be a hard one to break. So, if you don't want to use credit cards extensively when you're retired, don't get too comfortable with them now.
>> Establish an "emergency fund." To avoid tapping into your investments or relying on credit cards, establish an emergency fund containing between 6 to 12 months months worth of living expenses. Keep the money in a liquid account, such as a money market account. And when you retire, you may want to build an even bigger cash cushion. By following these suggestions, you can reduce the possibility of descending into debt during your retirement years.
Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at: gsteele2@pixi.com