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How To Retire Debt Free With A Nice Nest Egg Too

By Michael Redbourn

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Published: 06Jul2009
Word count: 762
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Not so long ago most Americans retired debt free, or close to it, and it was considered the norm, but that was then.

Now, an ever increasing number of Americans are retiring with huge amounts of debt, partly paid off mortgages, home-equity lines of credit, credit card debt, and even auto loans.

For many decades, there was extraordinary asset growth and low interest rates, and that combination allowed people to increase their net worth easily and significantly, and that in turn, made the paying off of debts a relatively painless experience.

It was always expected however, that the baby boomers would encounter a few bumps further down the road, but it was never seriously considered that the road might disappear completely!

Debt laden baby boomers have now become a major worry, and it's not surprising, given the facts.

Over a fifth (22%) of baby boomers presently owe at least $50,000 in non-mortgage debt, and just two short years ago, only 12% had debts of that magnitude.

Right now, four out of ten baby boomers owe more than $25,000 in non-mortgage debt, compared with one third in 2007.

According to various polls, the present recession has positively changed the way that many Americans are thinking and acting, and many Americans are now looking at ways to save money, and they're trying to pay off their car loans, credit cards, mortgages, home-equity loans and overdue bills.

The big exception to the above, if you haven't yet guessed it, are the baby boomers. They believe that they'll retire debt free, and seem to think that it will somehow just miraculously happen.

Most of them are not willing to make any lifestyle changes.

If however, you're a baby boomer who realizes that there's going to be a problem if you don't make some changes fast, then here are four tips that will hopefully be helpful.

1) It might seem like a good idea to borrow money from your 401(k) to pay down your debts, but don't do it. It's a low cost solution and therefore seems like a great idea, but it could create real problems if you get laid off.

In almost every case, a person that stops work is required to pay off the loan within 60 days.

2) Work either full-time or part-time for as long as you're able, so as to eliminate as much debt as possible before you retire. Remember that living on a fixed income, paying a mortgage, and trying to pay off debts at the same time won't be fun.

Do the work now, pay off the debts, and then retire.

3) Should you pay off debts, or save for retirement?

There are differing opinions on this one, but I'd suggest doing both at the same time.

Of course it will take longer to pay off the debts, but you'll have some money set aside for retirement, and the very habit of saving will be a good one to get into. Once you start saving, your mindset will change and you'll start to think like an investor, and will become less prone to impulse purchasing.

Let's take a quick look at some figures, which will hopefully help to put things into perspective.

a) A debt of $15,000 at an interest rate of 24% would take five years to pay off, if you paid $432 per month.

b) However, you'd pay off the same debt, with the same interest rate in nineteen months if you paid $1000 per month.

If you went with (a) you'd be able to save $600 per month, and be debt free in five years, plus you'd have a nest egg of around $41,000 - assuming that you got 5% rate of return.

Going with (b) you'd have close to $45,000 in your retirement account, so on paper it looks like the best deal.

Most behavioral finance experts would recommend plan (a) however, because they believe that most people would lack the willpower to pay off their debts, as required.

4) Means looking at, and then probably changing your lifestyle, and your spending habits. For a pampered baby boomer, this is one of the most difficult things to do, and it's often suggested that one way to help break a lifetime habit of spending, is to to reward yourself every time you eliminate a piece of your debt.

If you have a partner, then it's really important that they want to get out of debt too, because if they don't then the odds are against you.

If you don't have a partner, but would like one, then please choose one that either has no debts, or would like to get rid of them too.

The author of this article was a top film sound editor for many years and he produced a film for Columbia at a very young age. He has a passion and a flare for economics, and one of his websites -> Pay Off Debts features the famous Get Free In Three system which has helped a huge number of people get out from under suffocating debts.

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