On one hand, low interest rates are good for those borrowing money. On the other hand, easy cash can lead to excess debt — a place far too many Americans find themselves.
Today, the median credit card debt is $2,000 per person, the median student loan debt is around $9,000 and the median mortgage debt is just less than $60,000.1 Concerningly, today’s pre-retirees appear to be carrying more debt and are less financially secure than pre-retirees 25 years ago.2
One of debt’s biggest disadvantages is that it can hamper savings efforts. It’s difficult to spread discretionary income between savings and debt, and difficult to get ahead if you’re constantly making high payments on loans. Insurance can potentially help in a couple of ways. First, through the use of an annuity, it’s possible to use a portion of your current retirement assets to help create future retirement income, allowing you to use your current income to help pay off debt.
Second, life insurance policies with a death benefit provide an extra layer of financial confidence for loved ones, helping to pay off any debts should you pass away before they are paid. If you would like to discuss insurance options related to your current debt load and long-term retirement income goals, please give us a call.
Studies show that more than a third (38 percent) of Americans use their tax refunds to help pay off debt.3 This may be a good plan, since it often can be difficult to make extra payments toward debt when you’re on a tight budget. However, it’s also a good idea to try to balance your tax withholdings to match your tax liability by the end of the year. In doing so, you may be able to squeeze out some extra income each month to apply toward debt.
One way people may fall into debt is through medical expenses. As high-deductible health plans and co-insurance policies rise in popularity, even those with coverage can find themselves with insurmountable health care bills. Interestingly, while we might associate medical debt with older people who tend to have more serious health conditions, it turns out that the millennial generation tends to rack up more medical debt than other demographics.4
One in six Americans say they’ve had past-due medical bills show up on their credit report, even though 53 percent of those bills are less than $600 each.5 Physicians and hospitals, unlike traditional lenders, typically do not directly report unpaid bills to credit reporting agencies. These bills only affect your credit score when reported by a collection agency, so it’s important to negotiate a payment plan with the medical provider so that the debt doesn’t move into collection procedures.6
Another credit report misperception: Carrying a balance will improve your credit score.7 Instead, you can improve your score by using a credit card and paying the balance off on time each month.
One strategy to help budget your money and pay off bills is the 50-20-30 rule, which allots 50 percent of your income for needs, 30 percent for wants and 20 percent for savings. Here is a further breakdown of how to allocate available after-tax income:8
- 50% — rent/mortgage, food, bills, minimum debt payments and other essentials
- 30% — dining, entertainment, etc.
- 20% — savings, investment, etc.
Content prepared by Kara Stefan Communications.
1 Andrew DePietro. CBS News. Feb. 21, 2017. “The No. 1 thing Americans plan to do with their tax refund.” https://www.cbsnews.com/news/the-no-1-thing-americans-plan-to-do-with-their-tax-refund/. Accessed Aug. 10, 2018.
2 Annamaria Lusardi, Olivia S. Mitchell and Noemi Oggero. Pension Research Council. September 2017. “Debt and Financial Vulnerability on the Verge of Retirement.” https://pensionresearchcouncil.wharton.upenn.edu/wp-content/uploads/2017/09/WP-2017-15-Lusardi-et-al.pdf. Accessed Aug. 10, 2018.
3 Andrew DePietro. CBS News. Feb. 21, 2017. “The No. 1 thing Americans plan to do with their tax refund.” https://www.cbsnews.com/news/the-no-1-thing-americans-plan-to-do-with-their-tax-refund/. Accessed Aug. 10, 2018.
4 Laura Santhanam. PBS. July 26, 2018. “Millennials rack up the most medical debt, and more frequently.” https://www.pbs.org/newshour/health/millennials-rack-up-the-most-medical-debt-and-more-frequently. Accessed Aug. 10, 2018.
5 Ibid.
6 Donna Rosato. Consumer Reports. July 26, 2018. “What Medical Debt Does to Your Credit Score.” https://www.consumerreports.org/credit-scores-reports/what-medical-debt-does-to-your-credit-score/. Accessed Aug. 10, 2018.
7 Riley Griffin. Financial Advisor Magazine. July 2, 2018. “Millions of Americans Make a Costly Mistake When Paying Credit Card Bills.” https://www.fa-mag.com/news/millions-of-americans-make-a-costly-mistake-when-paying-credit-card-bills-39544.html. Accessed Aug. 10, 2018.
8 Julie Compton. NBC News. July 6, 2018. “How the 50-20-30 rule can help you get out of debt and save money.” https://www.nbcnews.com/better/business/how-50-20-30-rule-can-help-you-get-out-ncna889476?cid=sm_npd_nn_tw_ma. Accessed Aug. 10, 2018.
Annuities are insurance contracts designed for retirement or other long-term needs. They provide guarantees of principal and credited interest, subject to surrender charges. Annuity and life insurance guarantees and protections are backed by the financial strength and claims-paying ability of the issuing insurance carrier.
We are an independent firm helping individuals create retirement strategies using a variety of insurance products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic retirement income strategies and should not be construed as financial advice.
The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.
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