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Retirement Ready Checklist

  • TRANSCRIPT
  • In this video I discussed whether the modern retiree is debt-free or debt-heavy and also the numbers behind the answer to that question. Coming up next, on “Holy Schmidt”.
  • [Kid] Holy Schmidt!
  • If you read any book on retirement, there are three universal truths that they espouse. The first is to maximize the use of tax advantage savings vehicles or investment vehicles, like a 401k or Roth IRA, or a regular IRA for that matter. Maybe even rental real estate if you’re inclined to put the work in.
  • The second is that your post-retirement lifestyle will look different, maybe even a lot different than your lifestyle during your working years with expenses going down in some categories and going up in others. And the third is that you should enter retirement with little to no debt, if possible. And that’s the subject of this video. Is that a reality or is it a fantasy?
  • So let’s get into the answer to that question, but before we do, please make sure you click subscribe and notifications so that you get alerted the next time I post a video. I post about twice a week. Also stick around to the end because I’m gonna show you on average, for the retirees that do have debt, what percentage of their monthly income goes to servicing the debt payments.
  • Adults go through five debt stages in their lives. The first one is the young adult stage and that usually is comprised of debt around credit cards and student loans.
  • Then there’s adult debt. This is debt that comes in the form of things like mortgages. Then there’s middle-aged debt and this is debt that is acquired in your 40s and 50s.
  • This might include debt for things like opening a business or debt for other family members’ education besides your own. The next segment is the approaching retirement segment, 60 years plus, that debt is some combination of all of the above.
  • And hopefully your retirement debt is a much lower number. Well, let’s find out. By the way, the data we’re going to use is from the Federal Reserve Board data from microeconomic activity. It’s from May of 2021, so it’s hot off the presses.
  • And the population that was polled was a group of retirees, just under 40 million of them. So it’s actually quite complete. If you’re interested in more detail, I’ll put a link in the description to the report. It’s not the easiest read in the world, but it’s certainly very interesting for those that like that sort of thing. Also two last points.
  • This is debt at the household level, whether the individual is single or whether they’re married. And there is a distinction I need to make, which is the difference between mean and median. Mean is if you take all 40 million of those individuals and add up their debt and then divide that number by 40, that’s the mean, or the average. And the median is the debt held by the person right in the middle of that pack of 40 million. Sometimes the numbers are drastically different.
  • And finally, many people have zero balances. Other people have mega balances. So this information is directional. It may not be representative of your individual situation, particularly if you live on the coasts or in the center of the country. There tends to be a lot more debt if you live on the coasts and a lot of less debt if you live in the center.
  • Before we get into the individual categories of debt, let me give you the overall number for someone age 65. That’s $49,829.
  • That’s comprised of mortgage debt of $35,388.
  • That number is actually up from a few years ago pretty significantly. A home equity line of credit, or HELOC debt amount of $3,053. You don’t really see a lot of HELOCs these days but someone who is approaching retirement or in retirement could have secured a HELOC before they were a less-offered option at the banks.
  • Credit card debt of $3,778.
  • Auto debt of $4,202.
  • Student loan debt of $1,676. This number would have been coming down pretty quickly at this point.
  • And other debt of $1,729. All of those numbers represent the mean, or the average, not the median. So if that’s the mean, what percentage of people actually enter retirement debt-free?
  • Of the 40 million, only 10 million enter retirement debt-free. So 25%, unfortunately. Also the average debt service payment for those that are actually carrying debt is 40% of their monthly income. Paying debt, service payments, payments on credit cards, mortgage payments, et cetera.
  • If you liked this video, please make sure you click subscribe and notifications so that you get alerted the next time I post a video. Information around retirement is changing fast and I work very hard to get what’s out there in here.
  • Also check out this video on how to obliterate debt in retirement. This is Geoff Schmidt. Thanks for watching.

Geoff Schmidt

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3 comments

  • Is debt free really so desirable?

    Consider the retiree with significant assets in a conventional IRA and a moderate mortgage at 2.25%. With equities averaging 8%. Why cash in and pay taxes on IRA withdrawals?

    I prefer to let the stocks grow tax free in the IRA and gain the tax deduction of the mortgage. I used to have a goal of being debt free but why attempt it in this low interest rate environment?

    • The answer relates to tolerance for risk and type of debt. 8% is a lot of risk (and 2.25% is an exceptionally low mortgage rate). The DJIA has averaged about 10% per year for the last 50 years, but fell down 57% from October 2007 and March 2009. Now imagine if you retired in 2007 and needed part of that money to live. You would be selling at the worst possible time. Crystallizing the loss.

      Most people shoot for a lower risk return amount in retirement.

  • What is your thoughts about income annuities? I was told I should open one to help in the future.