Gary Alt, co-founder and financial advisor at Monterey Private wealth in Pleasanton, CA, was quoted in a MarketWatch article, "A realistic debt reduction plan for retirement," by Cliff Goldstein, published on June 10, 2014.
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A realistic debt-reduction plan for retirement
Published by MarketWatch.com; Author: Cliff Goldstein; June 10, 2014.
Debt is a pest that feeds on your retirement assets, draining the resources meant to sustain you for the rest of your life.
Whether it's the mortgage on the vacation home you rarely visit, or the boat that hasn't seen a drop of water since the last rain, liabilities will keep buzzing around you and prevent you from kicking back and finally relaxing.
A realistic plan to reduce your debt is the fly swatter you need for a worry-free retirement.
Decide what to pay off first
"Debt can rob a retiree of valuable income when they are no longer able to earn money to pay it," says Guy Baker, a financial planner in Irvine, Calif. "It is important to manage debt before retirement while at the same time not negatively impacting the capital that has been reserved for producing retirement income."
But reducing debt before or during retirement isn't a simple matter, and will likely require budgeting and planning. Most advisers recommend first paying off the debt with the highest interest rate, but Baker suggests a different approach: Starting small.
"The best way to attack debt is to pay off the lowest debt amount first while paying minimum payments on the rest," he advises. "Upon completion, take the money used to make those payments and apply it to the next smallest debt. You will be surprised how fast the debt mountain will disappear."
It isn't enough to plan — you have to want it
Gary Alt is a financial adviser in Pleasanton, Calif ., and he believes it isn't just the debt reduction plan — it's the desire.
"Nothing reduces debt faster than a burning desire to be financially free," he says. "Once the desire is there, any number of debt reduction methods will work."
For investors with a high net worth, Alt believes it can make sense to retain a mortgage if it has a low interest rate and a favorable housing market allows a return on investment higher than the after-tax cost of the loan. Considering a mortgage as part of your overall investment strategy offers a unique perspective. As Alt says, "All the equity in [a] home won't buy groceries or pay property taxes."
Consider what you own, and what you owe
Taking an objective view of the scope and magnitude of debt can offer a complete understanding of its impact on your retirement. A comprehensive financial plan will provide an overview of where you stand now and how future plans might be affected.
A typical financial plan includes a snapshot of your net worth: What you own and how much you owe, as well as a cash flow statement of current income and expenses. "Then their situation is projected forward with consideration for how their income and expenses will ebb and flow over time," says financial planner Andy Tilp of Sherwood, Ore. "At that point, the burden of the debt will be clear."
Then comes the development of a strategy to reduce expenses.
"An obvious assumption is [that] the acquisition of new debt ceases," Tilp says. "When a person is getting close to retirement, increasing income most often translates to working a few additional years. But often equally important, the client needs to make an honest assessment of where their expenses can be reduced. As a side benefit, reducing their spending while still employed is good practice in preparation for a possibly reduced spending rate in retirement."
An adviser can assist in implementing the plan, to the point of even recommending changes to a client's current spending behavior. Most important, a financial planner will monitor a client's progress to ensure the debt reduction plan is on target and determine if any further adjustments are needed.
Mind over money
While much has been written about the impact of human behavior on the process of investing , emotions drive our spending habits as well. Robert Riedl, a wealth manager in Milwaukee, believes it's a discussion well worth having—on a regular basis.
"It seems most debt options are lifestyle decisions which need to be revisited," Riedl says. "Do I need the multiple vacation properties, cars and boats, or can I simplify my life and sell off some underutilized assets and reduce my debts? Identify your long-term needs versus wants, and determine what can you afford to maintain and will use in the future. Sell the assets that are too expensive to maintain and underutilized to reduce your retirement debt burden—and enjoy the rest."