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The Average Retirement Savings of Millennials Isn’t Enough

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

The Average Retirement Savings of Millennials Isn’t Enough

A new MagnifyMoney analysis of recent Federal Reserve data reveals that millennials aren’t saving enough for retirement. This might not be shocking on its own, but the data also reveals that the gap between what millennials have saved compared with what they should be saving is surprisingly wide.

To set our benchmark, MagnifyMoney used the guideline promoted by retirement industry experts, such as Fidelity, that workers should have roughly two times their annual income in retirement savings by age 35.

We then compared the earnings, savings and ages of millennials as reported in the Federal Reserve’s Survey of Consumer Finances to see whether they are hitting that mark.

Here’s what our dive into the data revealed about millennials’ retirement savings.

Key findings

  • The median 2016 retirement savings level for households headed by 30-somethings was about $23,000, while the median income level was $55,400. This means that typical millennials in their 30s have saved just 41% of their income.
  • Based on that level of income, median households should have saved $112,000, according to a common rule of thumb suggested by retirement plan administrators and financial planners. That’s almost five times more than the actual median savings of $23,000.
  • This shortfall isn’t specific to the current cohort of savers in their 30s (millennials). Prior surveys show a persistent shortfall in retirement savings among 30-somethings in previous generations, too.
  • While high earners are saving slightly more than median or average earners, they still fall short of retirement savings guidelines. Recent data show 30-something households with income at the 90th percentile — $146,000 — have saved roughly 1.1 times their income ($160,000) in retirement accounts when the rule of thumb suggests that figure should be $292,000.

Millennials are 80% behind on retirement savings


Unfortunately, millennials’ retirement saving efforts are far behind the recommended benchmark. The median income for workers in their 30s is $55,700 per year. This puts the retirement saving target at around $111,400 by age 35.

The actual savings are far behind that, however, with the median retirement savings at just $23,000. In fact, a typical millennial has saved only 40% of their annual income at age 35. This is just about one-fifth of the amount they should have saved. (Average retirement savings levels are similarly short).

Median earners in their 30s aren’t saving nearly enough. But perhaps more surprisingly, a better paycheck doesn’t seem to help much, as even high-earning households are coming up short.

High earners save more, but are still behind

High earners do a better job saving for their golden years than their median-earning peers. This makes sense, as higher-income households will have more funds at their disposal that they can use to save.

But even high-income millennials still fall short of the target of saving twice their incomes. Part of that is because earning more results in higher salaries, which also raises the target amount they should save.

In 2016, households earning at the 90th percentile — those earning about $146,000 or more per year — had saved $160,000 so far for retirement. That might seem impressive since it’s nearly seven times the $23,000 median retirement savings balance among their cohort.

But based on their level of income, the retirement savings standard suggests they should have close to $300,000 saved. Yet these high earners are around five years behind on their savings, having saved just 1.1 times their annual salary.

Of course, these numbers won’t reflect every saver’s individual progress. A household that falls in line with the median retirement savings of $23,000 with an annual income of $20,000 might actually be doing OK. Or they might earn $200,000, and be even further behind than most.

Other households might have their retirement savings right on target for their 30s or even be saving more aggressively with the aim of retiring early. Overall, however, it’s safe to say that millennials whose retirement savings are on or ahead of schedule are the exceptions to the undersaving trend.

Millennials’ retirement savings are on par with previous generations’

Millennials are way behind the ideal benchmarks for their retirement savings, and that’s worrying. But do these millennials have it worse than past generations?

We took a look at the historical Federal Reserve data going back to 1998 to find out how millennials’ retirement savings levels compared with previous generations’ savings habits.


As this chart shows, millennials are actually saving better than previous cohorts of 30-somethings. This could reflect the conservative money management attitudes found among many millennials. After coming of age in the Great Recession, this cohort saw the importance of personal fiscal responsibility.

The average retirement savings for millennials in 2016 is $64,000, which is 14% higher than the $56,000 30-somethings’ average retirement savings in 1998 (all figures are in 2016 dollars).

Interestingly enough, millennials are saving more without earning more than previous cohorts — U.S. wages haven’t grown much in that time.

On top of stagnant pay, millennials have also faced historically higher levels of student debt. The average student debt among recent graduates was $39,400, and a typical monthly student loan payment for a millennial is $351. With this student debt, millennials have had fewer discretionary funds they could use to make retirement savings contributions.

The fact that millennials’ savings habits are outpacing previous generations despite these financial obstacles is a promising trend, but it still might not be enough.

The guideline to have twice your salary saved by 35 is, admittedly, an aggressive goal — one that 30-somethings have been falling short of for the past 20 years. But it’s what millennials should be shooting for to ensure a comfortable and financially secure retirement.

How millennials can catch up on retirement savings

If you’re a millennial, you might be wondering how your retirement savings stack up — and if you’re behind, what you can do to make up for lost time.

The first thing to do is figure out where your retirement savings “should” be, according to this guideline. If you’re 30, this will simply be equal to your annual salary; for 35-year-olds, it will be twice that amount.

For every year in between or above, you can simply add on an additional 20% of your annual income. A 38-year-old, for example, should be shooting to have 2.6 times their annual income in retirement savings accounts.

Once you have your number, start planning for retirement and taking steps to catch up. Here are some ways you can start saving more.

  • Take advantage of employer-provided retirement plans. If your employer offers a retirement savings plan, such as a 401(k), it can be an easy and simple way to contribute through your paycheck.
  • Contribute enough to get the full employer match. Many employers will include retirement savings matching in their benefits package. This usually means that they will deposit extra funds into your retirement account to match your own contributions, typically capped at a certain amount. Find the details about your employer plan and contribute at least enough to take advantage of this full match.
  • Open an individual IRA. You don’t need an employer to open a retirement savings account, however. Almost anyone can open an IRA or Roth IRA and start contributing to it on their own.
  • Get debt costs and payments under control. If you have student loans, credit card balances, or other debt, these monthly payments and interest costs will limit your ability to save for retirement. Look for ways you can decrease the costs of your debt, such as consolidating credit cards or refinancing student loans to lower interest rates. Prepaying debt can also be a smart way to avoid interest charges and get rid of debt, freeing funds up to use for retirement savings.
  • Shoot to save 15% or more. As you might have figured out, saving a year’s worth of earnings every five years requires some intense saving habits. Of course, these funds will be invested and generate growth and returns that will do some of the work for you, so you can save a little less than 20% of your gross income. Saving 15% of your annual earnings is the typical suggestion.
  • Increase your savings rate a little at a time. If saving 15% feels out of reach, start smaller. Increase your retirement contribution rate by just 0.5%-1%. Then give yourself a few months to adjust, then raise it again and repeat until you’ve reached your target retirement savings rate. This method can help you ease into higher savings and find the right amount to balance retirement contributions with today’s costs.
  • Save “extra” funds when you can. If you’re behind on retirement savings, you can use extra income to play catch up. Instead of using bonuses and raises as more take-home pay, for instance, you can contribute this increase in pay to retirement savings.

It’s not too late to start saving for retirement, and every dollar you contribute now will count more than what you’d save later. That’s because saving for retirement in your 30s gives these funds over three decades to grow and for that growth to compound — time and money you simply can’t make up for later.

Take a look at your retirement savings and find one thing you can do to save more. Your future self will thank you.

Methodology

MagnifyMoney examined data from the Survey of Consumer Finances, a triennial report issued by the Federal Reserve, to determine relative retirement savings levels for various age and income ranges from 1998 through 2016 (the date of the latest study). We only include households with savings in at least one retirement account. All figures are in 2016 dollars.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Elyssa Kirkham
Elyssa Kirkham |

Elyssa Kirkham is a writer at MagnifyMoney. You can email Elyssa here

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Retirement

I Am a Foreign National — What Should I Do With My 401(k)?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Thanasis Konstantinidis didn’t know what a 401(k) was when he got his first job in the United States almost four years ago. He just thought the term sounded a bit strange.

The 34-year-old software engineer from Greece eventually learned the basics of the classic American retirement investment account. But it didn’t exactly seem like the wisest move. He was granted a temporary work visa for three years. If at the end of three years he wasn’t granted permanent residency in his host country, there was a chance he would have to leave the country all together.

“My future was very uncertain at the time, and I wasn’t sure if I’d stay in the U.S.,” Konstantinidis told MagnifyMoney.

In 2016, there were 27 million foreign-born workers in the U.S., according to the Bureau of Labor Statistics. These workers made up nearly 17 percent of the American labor force that year, up from 13.3 percent in 2000.

Many non-native workers in the U.S. are young professionals hired by firms seeking workers with highly valued skills. In 2016, more than 870,000 foreign nationals were granted the most common temporary work visas. The U.S. has also seen a dramatic increase in the number of international students at colleges and universities in the past decade. After graduation, these students are often eligible for visas that allow them to pursue jobs in the U.S.

It is tricky enough for the average millennial to think about the future. The temporary immigration status of foreign nationals and the fact they may travel between countries in the future add additional layers of complication when it comes to retirement planning. How can they make long-term financial plans when they aren’t sure if they’ll be able to continue working in the U.S.?

In this article, we answered typical questions foreign nationals may have about 401(k)s as they pursue careers in the U.S.

Should foreign nationals contribute to a 401(k)?

The answer here may seem intuitive to those who, like Konstantinidis, think they will only stay in the U.S. for a few years. Tying up their funds in a 401(k) in a country they may be leaving soon might seem unwise. And by choosing not to participate in a 401(k) plan, they may have more cash available for their immediate needs.

In truth, there are pros and cons depending on a few factors, so you have to ask yourself a few questions first:

Do you view this 401(k) as part of a long-term investment plan or only as a short-term savings account?

When you are young and start saving early, you have a huge advantage on your side — time.

“Most of those folks who are here on a temporary visa tend to be young,” said Chris Chen, a Waltham, Mass.-based wealth strategist at Insight Financial Strategists. “They happen to be able to take the advantage of the power of compounding. That is truly a gift that you can’t get when you are older.”

It’s also an opportunity to invest in the U.S. market, which is among the strongest economies in the world and has a relatively mature and stable market with lower fund fees than many other countries.

Are you a high earner, which would increase the tax benefit of opening a 401(k)?

Another immediate and major benefit that you would lose is the tax advantage. Especially for those high-income earners, you are saving money by not paying taxes now, and when you withdraw the money at retirement, you will pay fewer taxes because ideally, you will be in a lower income bracket.

Is there an incentive to contribute to your 401(k), like a company match?

If your employer offers a match, you would be walking away from additional income if you fail to contribute. Many U.S. employers offer to match up to a certain percentage of employee 401(k) contributions.

For example, an employer may offer to match up to 3 percent of the employee’s contribution.

Let’s say you make $60,000 a year and contribute 6 percent (or $3,600) into a 401(k) for the year. Your company would match up to three percent (or $1,800) of that contribution. This means you would only contribute $3,600 to your 401(k) but end up with $5,400 thanks to the match.

“They would be leaving money on the table by giving up on the match,” said Chris Chen.

How certain are you about returning to your home country in the near future?

It may not feel like your odds of needing a U.S.-based retirement fund are certain, especially if your circumstances are anything like those of Konstantinidis.

However, Chris Chen argues that an international worker’s future isn’t all that uncertain. In fact, if anything is certain at all, it’s the fact that they will likely retire at some point.

“Whether it is India or China or Europe, when you go back to your country, you are going to have to use the tools available there for retirement,” he said. “And in the meantime, you will still have an extra little [retirement fund] out there in the U.S.”

If you were to leave the U.S., you have several options on managing your U.S.-based savings, some of which will require some administrative hassle. We’ll cover these options later.

Furthermore, your plans may change. You might have planned to stay in the U.S. for just two years, but you may end up staying longer. In that case, it could be wise to start saving for retirement early.

Can your 401(k) help with non-retirement goals?

Hui-chin Chen, a financial planner with Arlington, Va.-based Pavlov Financial Planning, who works with foreign nationals in their 20s to 40s, told MagnifyMoney some have other plans for their 401(k) than just retirement.

Many of her clients stayed in the U.S. for jobs after completing their college or graduate studies here. Although some eventually left the country, they still wanted their children to have the same study abroad experience. So they considered their 401(k) an education fund.

“They think, ‘Okay, I can leave some money in the U.S. I don’t care about taking it with me,” Chen explained. “‘And if I leave the money in the U.S., I might as well get some tax benefits. I can wait until I am older and I can take that money out to pay for their college.’”

Just keep in mind that if you try to tap your 401(k) for funds before you turn 59 1/2, you will likely face early withdrawal penalties and could be hit with income taxes.

The disadvantages of contributing to a 401(k)

While financial planners encourage foreign nationals to invest in their 401(k) in general, they would advise against the idea in some cases.

For those who are certain that they are just staying in the U.S. for a very short time, are in a relatively low tax bracket, and don’t see 401(k) as a long-term savings plan, experts suggest they open a taxable account — like a brokerage or savings account — or send money back home if they have better investment choices over there.

But do take note that you are a considered a U.S. resident from the tax perspective as long as you live in this country. This means if you invest outside the U.S., your income from those investments are still subject to U.S. taxes.

The tax benefits could justify the administrative hassle for those who have worked in the U.S. for a long time and have a big 401(k) balance. That’s because they are able to save a potentially significant sum of money without paying taxes upfront. And when they withdraw those funds later, they will likely be at a lower tax bracket and, hence, enjoy big tax savings.

For international workers whose stay in the U.S. is shorter, however, that tax benefit doesn’t necessarily pack the same punch, especially if their account has a smaller balance.

“It’s OK if [your 401(k) is worth] $200,000. If it’s $18,000, the benefit is offset,” said Andrew Fisher, president of Worldview Wealth Advisors, a financial advisory firm that specializes in working with cross-border individuals with U.S. connections.

How much should I invest and where do I invest?

If you’ve decided to open a 401(k) with a U.S. company, the next challenge is figuring out how much to save and where to save it.

The answer to the first question — how much to save — is simple if your company offers a match.

Sirui Hua, 26, a producer with a New York-based digital media company, told MagnifyMoney that he saves 4 percent of his income in his 401(k). His employer offered to match up to 4 percent of his income and he didn’t want to give that up.

“If I don’t save the money now, I’d have nothing when I go back,” Hua said. “At least I would have a little something one day I go home.”

Hua, originally from China, was recently approved for his work visa by his employer, which allows him to continue working in the U.S. for up to six years. Knowing that he has a full six years of stable work ahead of him, he is planning to increase his 401(k) contribution. He’s still not sure if he’ll use it as a retirement account if he returns home to China, but he would rather take the opportunity while he has it.

At least contribute enough to capture the full match. From there, consider increasing your contribution based on your other financial goals.

Depending on your personal goals and future plans, contribute more if you are able to. Just remember the legal contribution limit for 401(k)s is $18,500 in 2018.

It may also make sense to save cash in a standard savings account so that you can access money in an emergency. Remember, early 401(k) withdrawals come with potential tax penalties.

What do I do with my 401(k) if I leave the country?

This is the question that has deterred many foreign workers from investing in their 401(k) accounts.

There are basically two solutions: You can either leave it in the U.S. or take the money out and deal with the tax and early withdrawal penalties — and the potential hassle of getting a U.S.-based bank to transfer funds to an international account.

Leaving your 401(k) in the U.S.

You can leave your 401(k) with your employer’s plan administrator or you can roll it over into an IRA.

In general, pros recommend that you do not cash out your 401(k) before age 59 1/2 (to avoid penalty) if you don’t have to. Keeping your 401(k) is the easiest solution.

“It’s less likely that [the plan providers] will say, ‘We have to close your account,’” Hui-chin Chen said. ”Because as long as you are still a plan participant, they cannot kick you out unless there is plan provision specifying it.”

That being said, you will want to check in every now and then to be sure your investments are properly allocated based on your needs. Hui-chin Chen notes that companies may offer good low-cost index funds with balanced asset allocations for employees. However, it’s important to be sure your investments are well-balanced and you’re not taking on more risk than is suitable for your age and goals.

You can keep your 401(k) with most plan providers even after you leave the company, she added. However, there are exceptions. Check with your HR department and read the details in your plan documents to find out specific plan rules.

Rolling it over into a traditional IRA

Another option for workers who leave the country is to roll the funds into a traditional IRA (Individual Retirement Account) that you can control yourself. Just like a 401(k), you may be able to defer paying taxes on money contributed to an IRA.

A major difference between an IRA and a 401(k) is that you are limited to a total annual contribution of $5,500 ($6,500 for those over age 50) with the IRA. But an IRA may potentially offer a wider variety of investment choices than a typical employer-sponsored 401(k).

The challenge with opening an IRA for foreign nationals is that not many plan providers work with people with foreign mailing addresses because they are seen as a potential risk, experts said. You should check with brokerage firms to see whether they will hold accounts for people with international addresses.

The advantages of keeping your 401(k) in the U.S.

Potential tax benefits

When you withdraw your 401(k) funds from a U.S.-based account, it’s likely that your home country will not treat it as taxable income.

Tax laws in different countries vary. There is a grey area whether other countries respect the tax benefits of the U.S.-based 401(k) or IRA.

Fisher of Worldview Wealth Advisors explains that in his experience, most countries have not expressly accepted or denied the tax-deferred status of funds held in a 401(k) or IRA, but most foreign tax preparers are treating it as such. In other words, you may continue to enjoy a tax-free growth investment vehicle even if you move overseas. But you want to check your country’s tax laws to make sure this is the case.

The magic of compounding

Before you take this road, remember you could face a 10% early withdrawal penalty plus a hefty income tax bill.

If you’re a younger worker, you’re also missing out on potentially decades’ worth of growth that you might enjoy if you leave your funds where they are.

Let’s say you save $18,000 in a 401(k) over your time working in the U.S. It might seem like peanuts to you. But consider this: If you never contribute another penny to the account, you could grow that savings to over $317,000 over the next 40 years (assuming an average annual return of 7.2%).

“It’s no longer peanuts,” said Chris Chen. “When you take [the money] out, think of that $18,000, what are you going to do with it? People often do that without much savings, so they will end up spending it.”

Cashing out your 401(k)

If you don’t want to leave the money in the U.S. to invest for the long run, there are more tax complications and administrative hassle to contend with.

You’re allowed to withdraw the money from your 401(k) when you leave the country, experts say. The amount you withdraw will count as taxable income unless you’re 59 1/2 or older. You’ll also face a 10 percent penalty.

You have to notify your plan provider when you leave that you are no longer a U.S. tax resident. The provider most likely will withhold taxes on the money withdrawn, and you will have to file a U.S. tax return for that income the following year, Hui-chin Chen said.

If you want to save money on taxes, Hui-chin Chen suggests you wait until the year after you leave or even later to take the funds out. When your U.S. income becomes just the amount of money you withdraw from your 401(k), you may be put in a lower tax rate than when you had full employment income in the U.S., Hui-chin Chen said.

But note that you need a bank account to receive the distribution, and not every provider may be willing to mail a check to an overseas address. It is likely that you probably have to keep a checking account open in the U.S., which is also easier said than done — banks don’t like clients with foreign addresses, either, Hui-chin Chen said.

“In the grand scheme of things, [for] most people, if they don’t stay in the U.S. for the long term, taking the money with them is probably not that difficult the year they leave or the year after they leave when they still have some leverage with the bank,” she said.

If you have a sizeable 401(k), taking a small distribution each year to pay zero-to-minimum amount of taxes is doable, experts say. But then you are facing far more complicated ongoing maintenance, which includes filing taxes every year, and keeping a U.S. bank account and address live. You may also be subject to some state taxes depending on your resident country, Fisher said.

Although Konstantinidis didn’t contribute to his previous 401(k) plan, his employer invested 3 percent of his income in a 401(k) for him for free. Konstantinidis, who lived through nearly a decade of financial crisis in Greece, is ultimately skeptical about the stock market.

Now, the self-acclaimed “paranoid” computer scientist is considering contributing 3 percent of his income to the 401(k) with his current employer as he awaits his green card — he is settling down.

“I’ve actually seen my 401(k) go up,” he said. “That’s really impressive. Now I am convinced.”

401(k) Frequently Asked Questions

401(k) is the name of an account U.S. workers can use to save for retirement through their employer. The name 401(k) comes from the section of the U.S. tax code that it was derived from in the 1980s.

The traditional 401(k) allows workers to set aside part of their pre-tax income to save for retirement. It’s up to the individual to decide how much to save. Even if you are not an American citizen, you are eligible to participate in a 401(k) plan, experts say.

There is also a Roth 401(k) option, which is becoming increasingly common. With a Roth 401(k) you would contribute funds and pay taxes on them right away, with the ability to withdraw funds in retirement tax-free.

When an employee signs up for a 401(k) plan, they’re typically given a choice of different investments, such as mutual funds, stocks, or bonds. The benefit of a 401(k) is that you not only avoid paying income taxes on your savings now but you’ll have a source of additional income later when you are ready to retire.

The legal maximum amount you can save in your 401(k) is $18,500 in 2018.

Employers may offer to match employees’ contributions up to a certain percentage.

For example, an employer may offer to match up to 3 percent of the employee’s contribution. Say you make $60,000 a year and contribute six percent (or $3,600) into a 401(k) for the year.Your company would match up to three percent (or $1,800) of that contribution. This means you would only contribute $3,600 to your 401(k) but end up with $5,400 thanks to the match.

Some employers may vest your match immediately. That means as soon as they contribute to your 401(k) the funds belong to you. However, others may have a vesting schedule, which is a set timeline that dictates how long it takes for you to own the money your employer contributes.

Generally speaking, you can start taking money out of your 401(k) account when you reach age 59 1/2. There are ways to tap into your 401(k) sooner, but you’ll face an additional 10 percent early withdrawal penalty and you could owe income taxes on the amount withdrawn.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Shen Lu
Shen Lu |

Shen Lu is a writer at MagnifyMoney. You can email Shen Lu at shenlu@magnifymoney.com

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Mortgage, News, Retirement

How Can Baby Boomers Tackle Their Housing Debt Faster?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Unlike people of her father’s generation, Lauren Beale, 60, said she never expected to own a house outright at retirement. 

Beale, a former journalist who retired in 2015, pays $2,063 a month for a mortgage for her home in Palos Verdes Estates, Calif., in Los Angeles County, where she lives with her husband. The couple bought the house for $800,000 in 2002.  

They now owe $268,000 on the mortgage. And Beale said she had no plans to double up on her payment and pay it off faster. “What if you need that money for some kind of emergency down the road?” she asked. “We are comfortable with some mortgage payment. It doesn’t make sense to draw from the nest egg, the retirement accounts, to pay it down soon.” 

Beale, now a freelancer and novelist, said she would rather keep her savings as a safety net: “I think boomers are feeling less secure about our medical futures.” 

Retired with a mortgage 

The Federal National Mortgage Association, known as Fannie Mae, recently released an analysis concluding that baby boomers — those born between 1946 and 1965 — were 10 percentage points less likely to own their homes outright than pre-boomer people who were the same age in 2000.  

The report says the rise in housing debt among older homeowners is increasingly worrisome. There are concerns that having mortgage obligations could weaken seniors’ financial security in retirement and put them at greater risk for foreclosure, among other potential problems. 

Still, Beale is not concerned. Her family’s monthly mortgage bill is just roughly 20 percent of the total household income. They have no other debts, nor do they have major monetary needs. Her financial goal at this stage is to have enough money to live comfortably in retirement, pay all the bills and be able to travel. 

To be sure, not every boomer is as financially confident as Beale. Nationwide, boomers carried an average housing debt of about $68,400 in 2016, according to Federal Reserve data analyzed by MagnifyMoney. National statistics also revealed that a hefty 2.5 million people ages 55 and older became renters between 2009 and 2015, up 28 percent from 2009, the biggest jump among all age groups. RENTCafe.com, a nationwide apartment search website, said the notable change in renter profile could be that empty-nesters changed lifestyles, got hit hard by the housing slump or can’t afford to own homes. 

How to pay off your mortgage faster 

For those who do care about paying mortgages off before retirement, here are some ways to handle those debts faster and stay motivated to reach your goals: 

Paying off debt? It’s like earning more money 

Leon LaBrecque, a Michigan-based certified financial planner, said roughly half of his clients — mostly middle-class Americans — are able to pay off mortgages approaching retirement. A boomer himself, he is all for paying off mortgages as soon as possible to achieve  better cash flow. 

“Debts are an anti-asset,” said LaBrecque. “Removing an anti-asset is the same as having an asset. So If I got a 4 percent mortgage, I pay it off, I made 4 percent.” 

He added: “It’s very hard to make 4 percent now. The fixed-income market is so constrained that there are not a lot of good alternatives to debt reduction.” 

Pay off other debts. High-interest debt, in particular. 

Before paying down a mortgage or paying it off, get rid of other high-interest-rate debts first. Think student loans and credit card balances.  

LaBrecque offered this example:  Say you have a 4 percent rate on your mortgage and an auto loan with a $350 payment and a 5 percent interest rate — you should pay the car note off first. Then you can put an extra $350 toward your mortgage each month. 

Find money from other sources 

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If you have cash idling somewhere, with no particular purpose, pay off your mortgage. Remember: If you go and pay off a loan, there is an immediate return for what you’ve repaid. 

“You got $125,000 sitting in the bank, making nothing, and you owe $80,000 on the mortgage; pay the mortgage off,” LaBrecque has been telling his elderly clients lately. 

Also, if you have money in the market, consider getting rid of a sub-performing investment and put the resources into the mortgage, he said. 

Improve the cash flow 

Be conscious of how you spend your money. If paying off housing debts is your primary goal, prioritize it and allocate your money accordingly.  

“We always talk about having a good cash-flow management system for our younger population, but we don’t get a lot of that on the older population,” said Juan Guevara, a Colorado-based certified financial planner. “We always think that, ‘Well, those guys have figured it out.’ Well, maybe not.” 

Take a look at your cash flow holistically. When you track your spending, you can watch for opportunities to put more money toward your mortgage. For example, if you were helping your children pay student loans, see if they can take on the responsibility and redirect that budget toward your housing debt. As you approach retirement, consider using any bonuses or pay raises you receive to pay down debt.  

Break down big goals. Baby steps. 

It’s easier to make big goals and separate them into little pieces, experts say. Guevara advises that boomers divide their monthly house payment by 12 and add that amount to their payment each month.  

If your monthly payment is $1,500, for instance, “now you’re looking at a goal of having to add another $125 to each payment every month, instead of having to come up with $1,500 at the end of the year,” Guevara said. 

Refinance your mortgage 

Once you’ve managed a good cash flow, it’s likely that you are able to apply extra funds to your mortgage every month. This is when you may to consider refinancing the mortgage to get a lower rate or a shorter term. 

LaBrecque said he suggests that clients take out 30-year mortgages but pay them off sooner.  

“You can always turn a 30-year mortgage into a 15 but you can’t turn a 15-year mortgage into a 30,” he said. “I’m a big fan of having the obligation as low as possible on a monthly but also have the flexibility to pay it off.” 

Shorter home loans generally have lower interest rates, so you’ll not only pay off your mortgage faster, you’ll also pay less in interest.  

Beale has refinanced her mortgage twice to lower the monthly payment. Her current 20-year mortgage now carries an interest rate of about of 3.88 percent, significantly lower than the original 30-year loan. (It came with a rate above 5 percent.) 

You can learn more about this tactic in our guide to refinancing your mortgage. 

Educate your children  

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Guevara said he has seen an increasing number of parents spending beyond their means for their children: They’re taking on student loans, supporting sons and daughters after they finish school or offering other assistance. Those expenses chew up a significant amount of the money they could be putting toward the mortgage.  

“It’s not my place to tell them to stop,” he said. “It’s my place to show them, ‘Look, this is what happens if you don’t stop or if you continue on the path that you are on now.’” 

If you want to own your house outright earlier, Guevara said it’s worth starting to teach your children about the value of money and helping them become more financially responsible in an early stage. 

“Money is a taboo in our society, and it shouldn’t be,” Guevara said. “It should be something that we talk about at the dinner table.” 

Look forward to financial freedom

Beale and her husband will be debt-free in 13 more years if they stay in the same house and continue making payments as they’ve been doing. But she doesn’t seem to look forward to that day. 

“I think as we age, things that might seem like a happy occasion might be more of a sense of finality,” she said. 

But she also finds a silver lining — the financial freedom that comes when debt is paid off. 

“Who knows at that point; what if I have grandkids?” she said. “Maybe I’ll say: ‘Hey, my bills are paid. Maybe I’ll start taking that $2,000 and putting it into a college fund or something.’” 

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Shen Lu
Shen Lu |

Shen Lu is a writer at MagnifyMoney. You can email Shen Lu at shenlu@magnifymoney.com

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