Momentum - Business to Business Online Magazine October 2018 | Page 24

Top Retirement Mistakes By: Don Burrows, Jr. Hilltop Securities, Inc. [email protected] Retirement Mistake # 5 Failure to Manage Debt Bad debt is basically everything that is not deductible. This is one of the first questions we ask pre-retirees when they visit our office. It is our opinion, sometimes contrary to other financial advisors’ opinion, that when you retire you should at least eliminate all your bad debt. We have found that clients who have no debt can live on a lot less than those who are servicing debt. Yet, some pre-retirees tell us that as soon as they retire they want to buy that half-million-dollar motor home or an expensive vacation house. But they have 18 credit cards with $100,000+ balances! We have a client with three children in their late 20s and they are still paying for their student loan debts even though they don't have to. They don't really have enough assets to just cut them a check for $75,000 so they're paying it out monthly. I said to them, “your kids are in their late 20s and still accumulating money and are making enough to pay this debt themselves.” But they just felt that, as a parent, this was something they wanted to do for them. The bad news is— if they continue to give their money away, they won’t have enough for their own retirement. Are they expecting their children to fund them after they retire? Fidelity Investments conducted a survey which indicated that nearly half (48%) of Baby Boomers—regardless of whether they expect to retire with a pension—anticipate retiring with debt from some of life’s typical demands. The debts reported, from largest to smallest, were mortgages, credit card balances, car payments and student loans, for themselves, a spouse or their children. And what is just as sobering is this fact: During the 12-month period ending December 31, 2014, 936,795 cases were filed in federal bankruptcy courts. According to the most recent bankruptcy statistics, people 55 and older accounted for 28% of all bankruptcy filers in 2011. Getting out of debt before retirement is also crucial because many people don't understand that their healthcare costs are going to be very expensive, possibly $1000 a month for insurance and also long term care costs. One more thing to take into consideration about debt is property taxes. Texas has one of the highest property tax rates in the country. So if you have a $300,000 home when you retire you're looking at $9,000 a year just in taxes. Now, at age 65 you have the exemptions, but it's still a decent amount percentage-wise too, so that does not necessarily go away when you retire. So, it’s important to remember property taxes! If you are heavily in debt and need help, you might try restructuring it. For example, a client of ours is very involved with his church and he called us for advice on behalf of one of his church members who became ill and couldn't work anymore. He certainly could have considered declaring bankruptcy, but we advised him on restructuring debt, like a debt consolidation to lower the payments, and working with his credit card companies to try and reach a settlement. Here is another example of one of our clients, a married couple in their mid 50s who have a considerable amount of debt. They had a fair amount in their Roth IRA and they're both still working and want to continue until they are at least 70. But the husband decided to claim his Social Security benefits at 66. He was at full retirement age, so we suggested they begin to use the SS money to help pay down their debt. We suggested he stick with their timeframe and continue to work, but ignore the fact that they have that monthly benefit check and just start to whittle the debt down. They also took a partial IRA distribution at the end of last year because they were of the age to do it and were not penalized. They will take another partial distribution this year and that way they spread out the tax. They use the funds immediately to pay off a credit card and a high interest auto loan. We also recommended they sell a small boat that they rarely used. They were okay with that advice. We certainly will not suggest that a client retire if we don't think that it's in their best interest. Some advisors might recommend retirement and use an 8 or 9 percent performance assumption when they run the retirement plan Continued on next page