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The Debt is Paid Off… So What’s Next?

in Pay Off Your Debt, People & Products

what-after-debt

greg-becker-100This is a guest post by Greg Becker. Greg is an actuary, statistician, economist and social entrepreneur who founded www.GetGuidance.com to help people make better decisions about their health and wealth.  He has traveled extensively and been published in two books, and in newspapers and journals worldwide.

Paying off credit-card debt – or debt in general – is just one part of a well-balanced financial plan.

Getting out of debt can bring a sense of relief, but it doesn’t mean your battle for financial security is over.  There are many other aspects to consider. For instance…

  • Have you purchased the right insurance against accidents, illnesses and disability?
  • Are you building up a savings cushion – an emergency reserve to fall back on in emergencies?
  • And, the example I’d like to talk about todya, have you put enough money away for your planned retirement?

Retirement savings: A silent kind of debt

When we are in debt, the people to whom we owe money make a point of keeping the problem on our radar by sending regular statements. They don’t for a second want you to forget what you owe!  

This can act as a reminder, encouraging us to pay down our debt – even if at the time the statements and repayment reminders arrive, they are not something we appreciate.

Retirement saving is a little different: Nobody takes our retirement objectives and turns them into a plan!  We are not sent monthly statements showing us our progress  – or lack of progress – toward our retirement goals, and what we need to do now to achieve them.

With no plan and no regular monitoring of our progress, for many, retirement dreams will unfortunately be just that: Dreams!

For those who are not alert, a planned retirement date can creep up, but if you have not saved the funds needed to cover your retirement income, your planned retirement date will have to be deferred. In this way, retirement savings – or lack of it – becomes its own kind of debt!

So how do you make a plan?

The first step is to try to quantify how much money you expect to need in retirement

The next step is to break that into a series of annual savings targets.

If you don’t, you will never know if what you are doing is enough or too little, and you will probably find out only when it’s too late! 

It is also worth projecting how much you might save if you follow a particular plan (investment, pension, standard savings, and so on). There are several free calculators on GetGuidance.com that can help you estimate the impact of a variety of strategies.

If you have a desire to retire – and I hope we all do – then it is worth thinking of your retirement savings target as something like debt or a mortgage. Then, you can work toward “paying it off,” or having the right amount saved, in a planned and methodical way.

While it might be useful to see the hole in your retirement savings plan as a type of debt, there is one especially significant difference: Your retirement plans are flexible.

If you don’t achieve your retirement savings objectives, you will not be able to retire as planned. Either your retirement will be less lavish, or your retirement will start later.

For many people, it will probably be a combination of the two: A later retirement date and, when it eventually comes, a retirement with less monthly income than hoped.

If you start saving for your retirement late, it will be difficult to catch up and save what you need during the remainder of your working life.

That’s why, once you’re out of debt, you should consider almost immediately looking at your retirement position, and developing a plan that is achievable.

The plan might be the easy part.  The difficult part will be to stick to it, but at least you will have a plan and a way to regularly remind yourself about what you want to have saved.

In that way, your retirement dreams really can come true!

*****

Note from Joan: When Greg contacted me about sharing his “life after debt” idea, I was excited, because retirement is NOT a topic we touch on a whole bunch. Then, when I found out his idea involved setting a series of smaller goals – you know, like Very Next Steps? – I was thrilled!

Just because I’m still in the debt-payoff stage of my financial journey doesn’t mean I’m not thinking ahead, and I very much intend to apply the same “one step at a time” philosophies to my savings goals (when the time comes) that I do to attacking debt!

So how do you feel about your retirement savings?

Just right? Too small? “You’re crazy, I’m not even close to thinking about that yet?!”

We’d love to hear your stories in the comments!

{ 6 comments… read them below or add one }

Ree Klein December 19, 2013 at 10:01 AM

Greg, I love your metaphor…think of your retirement savings goal as a debt that must be paid in full. Having been a chronic spender in my young adulthood, I can relate to how retirement feels so far off and that it can be addressed later. It can’t.

However, I now sit just seven years from when the SSA says I can retire and so your words of caution ring crystal clear. Retirement CREEPS UP FAST! The good news is that I got control of my bad money-related behaviors and saved hard. With no debt, no mortgage and a lump of savings, I’m in “build” mode rather than being freaked out about my looming retirement.

To further your really important point that people need to figure out what they will need to live in retirement, I suggest that the simplest way is to just use the figure that represents today’s expenses. Meaning that if you spend $3,800/mo now, you should figure you’ll need enough invested to allow you to withdraw 4% of your assets to get that much after taxes. You’ll need your assets to produce roughly $60k/yr before taxes to net $3,800/mo. To generate that amount, you’ll need $1.5 million saved by the time you retire.

Using your logic…that’s a big debt that needs some attention early in life to get it paid off in time to retire!

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Jason Burk December 19, 2013 at 11:50 AM

You nailed it, Ree. Working backwards quickly tells you how much you need to sustain any given monthly income on investment earnings alone. It reinforces the importance level of that goal. Next step is definitely to think about this, along with my kids college funds.

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Bilgefisher December 23, 2013 at 10:34 AM

I caution people to be wary of trying to save for retirement based on a today’s living wage. Many folks would have been happy with 30k a year 40 years ago. Inflation is the hidden tax on all of us. You will need 9% return on investment just to keep up with that, let alone living expenses. Better plan on a larger pile of money, or better yet plan on an active investing retirement. Active investors (ie real estate, oil, business development) will be far better off than those that just plug money into a 401k or stock market and hope for the best. You can either take the wheel for your retirement or be a passenger. Passengers have very little say in the destination.

Jason

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Ree Klein December 30, 2013 at 10:23 AM

Hi Jason (Bilgefisher),

I don’t disagree with what you are suggesting; however, when talking to people who are trying to get a grip on their debt and plan for the future, I’ve found that it’s so overwhelming to try to figure out what they will need that they just stare into space. Discussion over!

The reason I start with simply basing a plan on today’s expenses is this:
1. It gets them to validate what it really costs them to live today, which often leads to the track-what-you-spend discussion. I’m sure you know that that practice can be very enlightening!
2. It opens their eyes to how much they will likely need to save, which leads to the realization that they need to start saving now.

In my experience, the beginning plan is never the plan that is carried through to completion. It’s a starting place on a long journey. It gets tweaked over time as information changes to get closer to the real numbers.

Cheers,
Ree

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MITM@NakedBudgeting December 29, 2013 at 5:46 PM

Great post. I’m going to check out the calculators on your site.
I recently wrote a post on my own blog about how to perform a type of “self insurance” by increasing your deductible. Which is a tried and true form of saving, but I *also* advocate putting aside the amount of that deductible for when you’ll need it.

Any thoughts on that?

It has the downside of tying up cash that could otherwise be invested but it frees up future cash flow that *could* be invested.

It is like an emergency fund, but if you already have a standard emergency fund to cover things like that, is that creating *too* much of an emergency fund?

Given that you’re an actuary and finance guy, I’m curious about your take on it!

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Ashlee Ayers January 2, 2014 at 4:28 PM

Thank you for the reminder that retirement is another debt we need to tackle! That’s a great way of putting it.

My dilemma is I paid off my student loans and became debt free one year ago. I spent 2013 building a decent emergency fund or savings account. Now I’m not sure if it’s better to continue to save every extra penny so I can pay cash for a different car when my 12 year old car gives out or split my extra money between a 401(k) and a savings plan for a different car.

I’m not sure what the most realistic way to stay debt free is going to be for me. Thanks for your tips on retirement funds!

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