When planning your retirement remix, a significant issue that can cloud your vision of the future is debt. If you’re shoveling money to a third party to pay for stuff you bought or consumed years earlier, you’ll have that much less cash to plan for your future.
Controlling your personal debt should begin the moment you can incur it: namely, when you turn eighteen or get your very own credit card with your name stamped across the front. Lessons about debt can be very painful, and it’s better to learn them early on in life. Owing money to other people, whether in the form of student loans, credit cards, taxes, or car payments, can be a real burden and limit your opportunities, particularly if you’re a young person.
When addressing your debt, it’s important to understand the type of debt that you have. Incurring long-term debt for an asset that you will own, is very different from borrowing money on something that depreciates, or, even worse, something that has no practical value, like a vacation.
I have a few rules about debt that I hope you’ll understand and take to heart as bedrock principles. In my opinion, you should never do the following when it comes to debt:
- DO NOT take out a payday loan. These loans carry super-high interest rates. Try to find a way to lower your expenses and somehow make more money. One simple way to start is to look for recurring charges on your debit or credit cards. Chances are you’ve signed up for some sort of recurring monthly service that you no longer use. Review your statements and note these recurring charges. If you find something you aren’t actively using, cancel it.
- DO NOT use credit cards to purchase experiences that you cannot afford. Don’t charge a luxury vacation to Jamaica, thinking that you’ll pay it off gradually. The only reason to use credit cards for routine purchases would be if 1) you’re tracking your business expenses with the card, or 2) you’re building up your reward miles, points or cash. It’s good to have several credit cards with very low balances, because this will boost your credit rating, which is a good thing. Just remember to pay them off in full each month.
- DO NOT fail to pay your income taxes. Messing with the IRS is a losing game, and when you fail to pay, the interest and penalties pile up quickly. (There’s a reason the song lyrics say, “I fought the law, and the law won.”)
Everyone borrows money at some point in their lives. The two forms of secured loans that affect most people are home mortgages and auto loans. (They are called “secured” because the lender has the right to seize the asset—house or car—if you default. “Unsecured” loans, like credit cards, don’t give the lender the right to seize your property.) Ordinarily, your home loan will be much bigger than your car loan. In addition, when you buy a home, you usually intend to keep it for a long time. Over time, historically speaking, if you buy a home at a reasonable price, it tends to hold its value. A home is considered to be a long-term investment, and (except during a severe recession like the one we experienced in 2008), it’s an investment that generally appreciates in value.
For a long time, the American dream meant owning your own home. For the average person, a big part of making that dream a reality is coming up with the cash for the down payment, especially for their first home. Utilizing a 30-year mortgage, rather than a 15-year mortgage, typically makes sense for most people. This allows for more cash flow flexibility and still allows buyers to accelerate payments to get the loan paid off faster, if they’re able. For folks who are nearing retirement, paying off their home is often one of their biggest goals. Using an account audit is also a very effective way to find extra money to reallocate toward extra principal payments.
On the other side of the coin, an automobile, or any other kind of mechanical equipment, can generally be seen as a depreciating asset. If you talk to most car dealers, they’ll readily tell you that if you buy a brand-new car, and then you trade it in within the first year or two, you will have lost a significant amount of the value of that car just by driving it off the lot. If you’ve borrowed the money to buy that car, and now it’s two years later, the car is worth less than you paid for it, but you’re still paying the loan on the original purchase price.
So, what’s the best way to own a car? Buy a good, reliable vehicle and keep it until it turns to junk. I know people who will buy a car that’s a year old—so the vehicle has been through that first dip in value—and then dutifully pay off a five-year car loan. After they have full ownership, they keep the car for as long as it will last. Some people drive cars with 150,000 miles on the odometer, and all they need to pay for are routine servicing, fuel, and insurance. You could conceivably pay your car loan for five years and then own your car outright for another five years, or even more.
Create a Budget
The key to managing your cash flow, your assets, and your liabilities (your debt) is to create a budget. If you look at anyone who has set a financial goal and reached it, you’ll see they were organized, had discipline, and stuck to a budget.
You can reverse-engineer your budget by starting with what you’re spending right now, and then figuring out where the money’s already going. That process will create your first draft budget and is really just a way to hold yourself accountable for how you spend your money. Once you get the first draft budget done, you can begin to be more deliberate and make choices as to how you should be spending your money in order to prioritize for tomorrow. If you create a budget, you are essentially just creating a record of where you spent the money yesterday and what you will need for tomorrow.
At first, this process may be a bit painful, but it will definitely be worth it to get a clear understanding of your finances.
There’s a reason why retailers put candy near the checkout lanes at the grocery store. Retail planners are very skilled at getting us to spend our money—almost subconsciously—and to make impulsive decisions. It’s a science, and they can predict how many units a product will sell based on its placement in the store. Over time, by creating a budget or a spending plan, you can be just as intentional about keeping your money as retailers are in getting you to spend it!
Consumer debt is also a subject that’s worth talking about. When you use your credit card, or when you’re doing something like buying a car, you’re consuming. You’re buying it, you’re spending it, and it’s not an investment—it’s something that you’re going to use, and you’re using credit to pay for it now, because you don’t have the money. The situation creates a very delicate balance. Credit cards are useful if you’ve got great cash flow and the purchase is something you can quickly pay off, but using credit cards for excess spending is a recipe for disaster. If you don’t have the money to pay them off each month, there’s a good chance you’ll get behind (and stay there) due to compounding interest on the debt—and that can be a tough cycle to break.
Taking on too much debt is the reason many people who reach retirement age have to keep working. They need to pay for things they’ve already bought, to impress people they don’t really care that much about. It’s important to be smart in the way you use debt, to make sure that you’re using it wisely and to plan for how you’re going to pay it back. Remember that banks, credit card companies, and lenders are intentional and very shrewd about getting you to sign up for payments.
You need to be every bit as intentional and smart about ensuring that any kind of payment or commitment that you make is something for which you have a plan to pay back.
Over the years, one of the craziest increases in cost besides healthcare has been the exorbitant rise in college tuition costs.
Most baby boomers can remember when their parents could pay for a year of college by simply writing a check for a few thousand dollars, or the student could pay for college entirely through work-study and a summer job. For most families, those days are over. According to Experian and The College Board, in 2019 costs for higher education were:
According to those estimates, a four-year degree program would cost $40,920 at the low end (state school) and $143,320 at the high end (private college).
To be fair, the figures above are the “retail” prices, which were often discounted with grants and scholarships. According to The College Board, the average annual net price of tuition and fees in 2019 at a private, non-profit, four-year school was $14,610. Students typically received an average of $21,220 in grant aid and tax benefits. Despite that help, the cost of college still totaled up to $58,440 for four years—and that’s just tuition.
And what about interest charges? The 2019-2020 federal student loan interest rates were 4.53% for undergraduate loans, 6.08% for unsubsidized graduate loans, and 7.08% for direct PLUS loans. The compounding of interest on these loans drastically increases the cumulative cost of the college experience for students who need to use loans to pay for their education.
According to Experian, student loan debt in the United States reached another all-time high of $1.4 trillion in the first quarter (Q1) of 2019. That’s an increase of 116% in just ten years and represents one of the nation’s most significant and widespread financial burdens to date. Nationwide, there are more than 148 million outstanding student loan accounts. Student loans represent the second-largest credit debt for Americans, trailing only mortgage loans.
Experian estimates that individually, Americans who have student loan debt carry, on average, $35,359 in debt per borrower. That’s a 26 percent increase over the past five years and, as of this writing, a two percent increase compared with the first quarter of 2018.
The average monthly student loan payment for graduates is $393, and the average time to pay off student debt is ten to thirty years. That’s $393 per month for ten to thirty years that can’t be used toward a down payment on a home, to start a business, or to save for retirement. What’s worse, the payment on their student loan debt can have a non-monetary cost: The freedom to pursue their best long-term opportunities. That can be potentially life-altering. It’s hard for a young person to choose to accept a “dream job” with a lower salary rather than a higher paying, less fulfilling job when they’re already starting out with a $393 per month obligation, even if the “dream job” might actually pay more in the long run.
Student loan debt matters to people who are thinking ahead to retirement because, according to studentaid.ed.gov, in 2019, student loan debt, including principal amounts and accrued interest, was highest for those aged 35 to 49. In a recent report by TIAA and the MIT AgeLab, 84 percent of student loan borrowers said their debt negatively affected their retirement savings. Nearly three out of four (73 percent) of borrowers reported they were delaying maximizing their retirement savings, saying they expected to begin or increase their contributions once their student loans were paid off. Among those who saved nothing for retirement, more than one quarter (26 percent) claimed they needed to first pay off their student loan debt.
One of the keys to the retirement remix is being able to structure your life in such a way that you have options. You can retire part-time, stretch out retirement and be able to actually live a little while you’re working. Having to spend a large portion of your take-home pay either for your own, or for your children’s student loan debts can put a serious delay in enjoying the here and now.
All in all, you want to make sure that you’re being deliberate about your debt. The key to any retirement plan is making sure you have more cash flow coming in than going out. For many people, a chunk of what’s going out is servicing various forms of debt. Ask yourself this – do you have existing debt? If so, do you have a goal and a plan for how you want to pay it down or pay it off? If you don’t, buckle down and make a plan today.
It’s a basic truism that the people who are truly successful—the millionaires and billionaires who made their own fortunes—love their jobs. They can’t wait to go to work in the morning. They don’t see their work as drudgery. They see it as an integral part of who they are. Most of them would do their jobs even if they didn’t get paid to do so.
Consider Donald Bren.
With an estimated net worth of $16.3 billion, Donald Bren happens to be the most successful real estate investor in the United States. He started his business in 1958 with a $10,000 loan, which he used to build a house in Newport Beach, California. He sold it and built more houses, and then founded the Bren Company, which built homes in Orange County, California. In 1977, he joined a group of investors to purchase the Irvine Company. He soon gained control of the privately held firm, which today develops suburban master-planned communities throughout Orange County, and owns roughly six hundred residential, retail, and office buildings across the nation.
In 2011, when Bren was seventy-eight years old, Scott Kraft wrote in the Los Angeles Times that Bren would sit at his home drafting table at night, studying designs for houses, office buildings, shopping centers, and resorts. Said Robert Elliott, senior vice president in charge of the twenty-three-person design team at the Irvine Company, “He’ll blow in the next morning with a whole wad of tracing paper and overlap drawings for all of our projects…. It’s amazing, because hardly anybody draws anymore. But he draws very well.”
Donald Bren is a person who loves his job. He could have retired decades ago. But to him, his job is fun. He likes it.
You might say, “Well, he’s lucky. He got a job that he loves. And if I made that much money doing my job, I wouldn’t retire either.”
Really? I’m not so sure it was simply luck. Bren graduated from the University of Washington with a bachelor’s degree in business administration and economics. At the age of twenty-four, he tried out for the Olympic ski team but did not qualify following an injury. Then he served as an officer in the United States Marine Corps but decided not to make a career of it. It was at the age of just twenty-six, that he built his first house. There was no guarantee that he would succeed. Plenty of would-be real estate developers go broke. But Bren was smart, and he loved the job, and instead of the job wearing him down, it energized him. That energy stayed with him for the next fifty years.
The above article originally appeared as a chapter in The Retirement Remix and is reprinted with permission from the author Chip Munn. No parts of this article may be reproduced without correct attribution to the author of this book.
You can find the full book here.