Debt gets a bad name in some financial circles, with well-known money gurus touting an all-cash lifestyle as the only way to achieve financial freedom. However, the reality is often much more complex than a blanket “good” or “bad” label applied to credit usage.
Given the bad press surrounding debt, many people worry that the amount they owe will prevent them from realizing a happy and financially secure retirement. To determine how your debts will affect your retirement plan, answer the following important questions.
How Much, and What Kind of Debt Do You Have?
When evaluating the impact of debt on your retirement plan, the first thing to consider is the amount you have borrowed. The volume of your debt has a significant impact on your ability to secure additional financing, your monthly budget, and your ability to save for other financial goals.
The type of debt that you have incurred also matters. Debts that finance hard assets, especially those that generate a return, can help to grow your net worth and create a positive impact on your long-term financial health. On the other hand, debts that finance everyday spending do not result in the ultimate ownership of an asset and generally have a negative impact on your net worth in the long run.
What Does the Rest of Your Financial Picture Look Like?
While the amount of debt you carry is an important factor in your retirement plan, that number alone doesn’t tell the full story. A more valuable metric to consider is the proportion of debt to your overall wealth – assets and income.
When you have more debt payments than income and don’t have steadily appreciating assets to overcome the shortfall, you can’t save, and you are losing wealth every day. This level of debt is nothing short of disastrous to your retirement plan.
On the other hand, those with significant assets often borrow to avoid selling them or even just to avoid capital gains taxes. That’s why the very wealthy often carry an amount of debt that appears dangerous to the untrained eye, but in their case could be part of an incredibly wise financial plan.
How Far Away Is Your Planned Retirement?
If retirement is many years away, you have more time to pay down debt or increase your retirement savings. This lengthy timeframe also provides the opportunity for assets to appreciate, helping improve your net worth in the long run. However, if you wait too long to start saving for retirement, you could forgo the benefits of compound growth.
As retirement nears, you have less time to eliminate debt and for your retirement assets to grow. It becomes even more imperative during this time to reduce debts with a high monthly payment relative to your anticipated retirement income. That’s because entering retirement with substantial debt may force you to withdraw more from your savings each month to cover the payments. These early withdrawals could deplete your nest egg faster than you expect.
After carefully considering the aforementioned questions, review your answers with an experienced financial advisor to determine how debt will impact your retirement plan. Your advisor can work with you to understand your unique situation and whether your debts will be a benefit or a hindrance to your financial success.
Plan For Your Dream Retirement with Meld Financial
At Meld Financial, our team can help you assess how debt impacts your retirement plan. We can also help you determine if eliminating debt prior to retirement is likely to benefit your financial situation or cost you money.
Debt management is just one part of our comprehensive retirement planning program – Financial Fingerprint®. We developed this tool in-house to bring together the most important pieces of your financial puzzle into one easy-to-understand plan. Best of all, it adapts to changing circumstances, so you always know where you stand in relation to your ever-evolving financial goals.
To learn more about Financial Fingerprint® or discuss your personal situation, contact us today.
