Posted on 07/21/2008 8:15:48 AM PDT by CSM
Ask the typical American, "So, what do you want to do when you retire?," and you're bound to get any number of answers. After all, we all have lifelong dreams that we'd like to fulfill at that time. But change the question to, "So, what will you be doing when you reach retirement age?," and the answers you'll get will likely have less to do with satisfying personal wish-fulfillment and more to do with satisfying financial necessity.
"You want to reach your golden years with financial dignity, and that will only happen if you have a plan," says Dave Ramsey, money management expert, best-selling author, and host of the nationally syndicated radio program, "The Dave Ramsey Show."
Ramsey says that a majority of Americans do not systematically prepare for retirement by investing. But investing for retirement is just one part of the retirement equation.
The other part involves eliminating debt before you reach age 65. To get Bankrate's readers thinking seriously about debt-elimination and the thorny financial challenges debt causes for the fiscally unprepared in retirement, Ramsey shares his experiences with callers and answers questions pertaining to debt.
Q: Why is it imperative that debt be eliminated before you reach retirement?
A: It's imperative that debt be eliminated as soon as possible, for that then gives you control of your most powerful wealth-building tool: your income. It is very difficult to service debt when you're in retirement, and most people who have debt going into retirement are not people who have big savings going into retirement. So it creates a really catastrophic situation.
I recently talked with a 72-year-old lady who owes $80,000 on her house and she's trying to live on a monthly Social Security check of 1,100 bucks ... and what that says is that she's not going to be able to keep that house, not if she wants to live and eat.
This idea that a mortgage is forever is a bad plan; this idea that debt is forever is a really bad plan. Debt will only steal your golden years away from you.
Q: Is the problem of having too much debt chiefly a problem of the young and middle-aged, or are retirees also increasingly overburdened by debt today?
A: The fastest growing area of bankruptcy filers are senior citizens -- and college-agers are right behind them. So, as the boomers, who were notorious for overspending and under-saving, start hitting retirement, I wish I could be happier as to what I'm going to see. But the statistics aren't good, and past financial sins have a nasty way of catching up with you.
Now certainly there are baby boomers and other people already in retirement who have done really well. There are, after all, lots of stories out there of fortunes still being made by people who are in their 60s, 70s and even in their 80s. But it certainly would be better to enter those last three decades of your life with a little bit of money.
Q: Is there such a thing as a "good debt" to have in your retirement or early pre-retirement years? For example, if you have an unpaid mortgage, there are some financial experts out there who will argue that you're benefiting from a nice tax deduction. So, if you can still afford those mortgage payments in your 60s, does it make any sense to pay off the house earlier?
A: I don't think there is such a thing as "good debt" to have, I really don't.
Debt does two things. First, it increases risk and, second, it robs you of cash flow. Both these things affect your ability to invest and become wealthy.
It doesn't make sense to trade prolonged debt and interest payments in return for a little bit of a tax-break -- and folks we're talking a little tax break here. If you pay out $10,000 in interest and you're in the 25 percent tax bracket, it only saves you $2,500 in taxes. Well, when I trade a dollar for a quarter, I wouldn't call that a good deal
Q: Some financial planners and advisers recommend that people use personal financial ratios to prepare for retirement. Such plans offer people clear decade-by-decade benchmarks and targets that can help them move from a situation of high debt and low savings to a situation of high savings and low debt over their lives. What is your opinion about financial ratios when it comes to retirement saving and debt elimination?
A: Well, most financial advisers are a lot more lenient when it comes to debt than Dave Ramsey is. So, my opinion would be that I would get a little more hard-core -- OK, a lot more hard-core -- than most of those debt-type ratios would indicate.
But anything that folks can do that'll give them a wake-up call and help them to realize that, "Hey, I need to move away from debt to savings," well, that's going to be a good thing.
Q: Is the problem many of us are experiencing with debt being exacerbated by short-term financial thinking?
A: Yeah, it is. It's too much "Thank God it's Friday, oh God it's Monday" type thinking.
Studies have always shown us that people who think longer term are the ones that tend to win financially. The people who are thinking in 10-year blocks of time, the people who are thinking five-year blocks of time, they are the ones who actually end up profiting. But if you think and worry about only Friday, then you'll tend to do payday lending, rent-to-own, and all that type of garbage and you're always going to be broke with that.
Q: Based on your experiences with callers, what are the primary challenges and problems American seniors are facing in retirement? Would many of these have been avoided had they lived more debt-averse lifestyles?
A: I think if they had been a little bit more debt-averse, certainly they would have avoided lots of problems. But, the other thing is, had they been a little more proactive with their savings, I think that that would have also led them to be more debt-averse.
It's a two-edged sword: You not only have to get out of debt, but you have to take the money that you used to pay out in payments and then save and invest it.
Q: Why are we doing such a poor job when it comes to saving and investing money for retirement? Is it a case of not being exposed to fundamentals of capitalism in the classroom? Or are we having problems because practical lessons about saving and investment were never taught in the home?
A: I think it's all of the above, and I'm not sure why we're doing such a lousy job, honestly, but we are. You know, even I'm amazed that I got a finance degree and the first time that I understood the power of compound interest was four, five years after I graduated from college. I understood the math of it, but I never related it to, "Oh, so that's how you get rich."
I actually had this rich guy, someone without a degree, sit down and show me what it looks like to save a couple thousand dollars a year into an IRA and tell me, "Here's what you'd have." And I went, "Oh my gosh! I'm only 20-some years old. If I start doing that now, look how much I'm gonna have!" Nobody ever put that in that way to me, and I went through a four-year degree in finance.
Q: So, what everything comes down to is this: Each individual has got to spend significantly more time knowing what's going on with their life, with their money, and with their relationships and career than they do with just being entertained into oblivion.
A: I always laugh on the radio and say that the average millionaire can't tell you who got thrown off the island, but they can tell you exactly what they have in their 401(k).
Q: You talk about "baby steps" on your show and in your book, the "Total Money Makeover." Are there any special steps that you'd add or recommend for people who are serious about preparing financially for retirement?
A: I will often get asked, on my show, questions by someone who's 55 or 60 years old ... is it too late? Obviously, it's easier when you're 27 than when you're 57, but it's never too late. And so you don't change the "baby steps" because, still, your most powerful wealth-building tool is your income -- we still have to get that freed up -- and the only thing that really changes (later in life) is the intensity with which you attack the problem. It might be an intensity that is a little bit more fear-based at that point, but that's okay. That can be an additional motivator to change behavior for the better.
Q: Is a reverse mortgage a viable fallback option for folks who'd not saved enough money for retirement? What should people be aware of when considering this option?
A: Reverse mortgages are some of the worst products to have ever come along in years. And the reason why is really simple: They have unbelievably high fees and the interest rates associated with them are a total rip. If you are in a position that your only option, in your mind, is to borrow money on the house, just go and get a regular mortgage -- you'll get a much better deal that way -- and then invest that money and live off of it. It's just a much, much better deal than a reverse mortgage.
Reverse mortgages are being touted everywhere because they are very profitable -- and those are just the ones that are being done legitimately. But the Federal Trade Commission also warns us that reverse mortgages are one of the areas with the biggest problems of scams among the elderly. There are many reverse mortgages that are improperly done and there's a huge amount of con artists hanging around these things, so I tell people to avoid these things completely.
But whenever we're in a situation where we start borrowing on assets in our 70s, we're just needlessly playing games with the inevitable. I prefer that you just look at your situation and deal with the inevitable. If you're 72 years old and all you have is the house, and you can't afford to eat, yes, it's a very emotional decision. You might have lived in that house for 50 years, but you probably need to sell that house and you'll probably need to move into a home that's smaller so that you can free up some cash to eat with.
Q: If there is one critical message about debt and retirement that you'd like to emphasize most to Bankrate's readers, what would that be?
A: Avoid it and get out of it as quickly as possible. Debt is just a financial death knell, and if it adds risk to the life of the 32-year-old parent of three children, it adds tremendous risk to the life of the 72-year-old retiree.
Enjoy.
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I love the sad sacks that call into Dave’s radio show. There, but for the grace of God....
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Yes—I enjoy his hard-headedness. He’s the Ann Coulter of personal money management. And I think Suze is a sensible lady, but I enjoy Dave’s show more.
Dave uses good old fashioned common sense and thrift combined with hard work, grit and determination. A winning combination since the dawn of time.
Why do you “love” them?
Suze is too focused on FICO for my taste. I like Dave’s no-debt attitude.
I’m 100% debt free and let me tell you all that it’s awesome!
We are getting there. No more credit card debt, wife just paid her car off and I have 2 more payments on mine. Then we attack the house mortage. It's a great feeling. Screw the materialism. All it does is bring heartbreak.
Right on! Good for you.
It’s amazing how people are caught up in the size of their house, car, TV, etc. Forget all that nonsense!
This guy is a moron. If you have your house fully paid off, then take out a $100,000 mortgage at current low interest rates, you INVEST that cash in an FDIC-insured CD. He left out the the investment income from his sorry excuse for math. At current mortgage and CD rates, someone in even the lowest tax bracket (and believe me, nobody who isn't is paying the slightest attention to this crank) will break even after the tax deduction. You've got the low mortgage rate locked in, and interest rates are only going to go up, possibly by a lot. As interest rates rise, and you reinvest at higher rates, you start making an after-tax profit. When long term interest rates rise high enough, you lock that in with a long-term CD and relax. If somewhere down the road, the rate you can get when rolling over the CD drops below your breakeven point, you simply don't roll over the CD when it matures, and you pay off the mortgage. No risk, plenty of potential reward.
Just because you don't LIKE the fact that the tax code rewards this scheme doesn't change the fact that it's profitable. Makes no sense to let the tax system tax you to its heart's content, and then voluntarily pass up the few opportunities it provides to get back some of what it took from you.
You must work for a bank. LOL Sorry I will pay off my house and not be a slave to the bank.
BTW: Most CD’s are paying right now are what 4.75-5.25% for 5 years??? And what is a 30 year mortage? 6.25-6.30%??
Also the cd money is non qualified so you have to pay taxes on the gain every year.
Better to pay the house off and max out your Roth IRA or 401K and get the tax defeered growth on the 401K
Rule #1: Get yourself out of debt.
Rule #2: Stay out of debt.
You will pay more taxes on your gain than you will get back in a deduction
The CD’s in this area are paying about 2% less than what you stated, plus you have to pay income tax even on that small interest. I don’t see any way to make money on a deal like that.
Who knows if interest rates are going to rise?? Look at Japan, nearing almost 20 years of .35%-1% interest rates
Amen, this just proves the wisdom of Scripture. Proverbs 22:7 “The rich rules over the poor, and the borrower becomes the lender’s slave.”
Gold is a better bet.
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