CAUTION: Your Financial Adviser Won’t Like This Strategy

Dear Money & Crisis Reader,

Yesterday, we saw just how devastating debt can be for your retirement.

Jack and Arlene had planned to spend their golden years sipping frosty margaritas by the sparkling Caribbean.

But when the financial crisis hit, they took a loan from their 401(k)… and refinanced their home.

Now they’re spending their “retirement” working to pay off their substantial debt.

And they’re not alone.

Excessive debt after retirement is the 300-pound gorilla in the room that no one wants to talk about.

You might find it hard to believe, but today’s Americans are entering retirement with more than twice as much debt as previous generations, according to a study by Wharton School professor Olivia Mitchell.

In the early 1990s, the average total debt for those 56–61 years old was $39,000. But today, that number is closer to $99,000.

Professor Mitchell says the huge spike in debt was caused in part by the belief that home prices never go down.

“They [were buying] more expensive houses with bigger jumbo mortgages, due to a combination of rising home prices and easier terms such as low interest rates,” says Mitchell. “So when the financial crisis hit, that was a great shock to many.”

The Juggler’s Guide to Saving Your Mortgage

Nine times out of 10, the “solution” to your financial problems is going to be “pay more money into X account” or “earn more money.”

And that can be good advice, to a point. But eventually you’re going to have no more money to give… or you’ll be spreading your finances too thinly…

Think of your finances as a juggling act.

The goal is to keep all the balls — 401(k), paying off debt, investments, etc. — in the air.

But if you try to juggle more than you can handle, you’re going to start dropping balls.

The solution — to stick with this juggling analogy for a moment — is often to simply take away one of the balls…

Essentially, I’m talking about prioritizing certain payments over others.

Not forever, of course… just until you’re more financially secure (which you will be after using this strategy).

The plan is to defer your 401(k) payments until you’ve paid off all your debts except your mortgage.

Now, I know this flies in the face of conventional investing wisdom — everyone and their dog knows you should be investing for your retirement.

And if your employer matches a percentage of your 401(k) contribution, you are going to be leaving money on the table.

But if you have high-interest debts, your money is much better spent wiping those debts off the chalkboard ASAP.

It may not seem obvious at first.

I understand that it’s easy to think of paying off debt as money already spent. But by paying back your loan early you’re getting a “return” from the money you’re not spending on the interest.

This “return” is more than you’ll earn on any savings account and typically more than the money you’d earn on the stock market.

On the other hand, if you just pay off the minimum monthly payment, this debt is going to eat into your savings — and you’re going to end up with a net loss.

Now, I might get some flack for saying this. But the math works out.

You’ll have more money in the long run. And more importantly, you won’t end up wandering into the next financial crisis with a time bomb strapped to your back.

Once you’ve paid off your high-interest debts, you can start paying back into your retirement fund…

Or you could take one final step to secure your finances against financial disaster.

It shouldn’t take longer than a few months to put together… but you’ll be glad you did.

This is a critical step in your financial plan… and we’re going to do a deep dive on this idea tomorrow.

Until then, if you’d like me to discuss any topics in particular, you can reach me with a quick email by clicking here. Let me know what concerns you the most about your financial future.

All the best,

Owen Sullivan
Editor, Money & Crisis

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