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Older Americans Are Getting Crushed by Debt, New MagnifyMoney Analysis Shows

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

More American seniors are shouldering debt as they enter their retirement years, according to a new MagnifyMoney analysis of data from the latest University of Michigan Retirement Research Center Health and Retirement Study release. MagnifyMoney analyzed survey data to see whether debt causes financial frailty during retirement. We also spoke with financial experts who explained how seniors can rescue their retirements.

1 in 3 Americans 50 and older carry non-mortgage debt

The Health and Retirement Study from the University of Michigan Retirement Research Center surveys more than 20,000 participants age 50+ who answer questions about well-being. The survey covers financial topics including debt, income, and assets. Since 1990, the center has conducted the survey every other year. They released the 2014 panel of data in November 2016. MagnifyMoney analyzed the most recent release of the data to learn more about financial fitness among older Americans.

In an ideal retirement, retirees would have the financial resources necessary to maintain the lifestyle they enjoyed during their working years. Debt acts as an anchor on retiree balance sheets. Since interest rates on debts tend to rise faster than earnings from assets, debt has the power to destroy the balance sheets of seniors living on fixed incomes.

We found that nearly one-third (32%) of all Americans over age 50 carry non-mortgage debt from month to month. On average, those with debt carry $4,786 in credit card debt and $12,490 in total non-mortgage debt.

High-interest consumer debt erodes seniors’ ability to live a quality lifestyle, says John Ross, a Texarkana, Texas-based attorney specializing in elder law.

“From an elder law attorney perspective, we see a direct correlation between debt and institutional care,” Ross says. “Essentially, the more debt load, the less likely the person will have sufficient cash assets to cover medical care that is not provided by Medicare.”

Even worse, debt leads some retirees to skip paying for necessary expenses like quality food and medical care.

“The social aspect of being a responsible bill payer often leads the older debtor to forgo needed expenses to pay debts they cannot afford instead of considering viable options like bankruptcy,” says Devin Carroll, a Texarkana, Texas-based financial adviser specializing in Social Security and retirement.

Some older Americans may even be carrying debt that they don’t have the capacity to pay.

According to our analysis, 40% of all older Americans have credit card debt in excess of $5,000. More than one in five (22%) Americans age 50+ have more than $10,000 in credit card debt. On average, those with more than $10,000 in credit card debt couldn’t pay off their debt even by emptying their checking accounts.

Over a third of American seniors don’t have $1,000 in cash

It’s not just credit card debtors who struggle with financial frailty approaching retirement. Many older Americans have very little spending power. More than one-third (37%) of all Americans over age 50 have a checking account balance less than $1,000.

Low cash reserves don’t just mean limited spending power. They indicate that American seniors don’t have the liquidity to deal with financial hardships as they approach retirement. This is especially concerning because seniors are more likely than average to face high medical expenses. Over one in three (36%) Americans who experienced financial hardship classified it as an unexpected health expense, according to the Federal Reserve Board report on the Economic Well-Being of U.S. Households in 2015. The median out-of-pocket health-related expense was $1,200.

Debt pushes seniors further from retirement goals

Seniors carrying credit card debt exhibit other signs of financial frailty. For example, seniors without credit card debt have an average net worth of $120,000. Those with credit card debt have a net worth of just $68,000, 43% less than those without credit card debt.

The concern isn’t just small portfolio values. For retirees with debt, credit card interest rates outpace expected performance on investment portfolios. Today the average credit card interest rate is 14%. That means American seniors who carry credit card debt (on average, $4,786) pay an average of $670 per year in interest charges. Meanwhile, the average investment portfolio earns no more than 8% per year. This means that older debtors will earn just $4,508 from their entire portfolio. Credit card interest eats up more than 15% of the nest egg income.

For some older Americans the problem runs even deeper. One in 10 American seniors has a checking account balance with less than $1,000 and carries credit card debt. This precarious position could leave some seniors unable to recover from larger financial setbacks.

Increased debt loads over time

High levels of consumer debt among older Americans are part of a sobering trend. According to research from the University of Michigan Retirement Research Center, in 1998, 36.94% of Americans age 56-61 carried debt. The mean value of their debt (in 2012 dollars) was $3,634.

Over time debt loads among pre-retiree age Americans are becoming even more unsustainable. Today 42% of Americans age 50-59 have debt, and their average debt burden is $17,623.

Credit card debt carries the most onerous interest rates, but it’s not the only type of debt people carry into retirement. According to research from the Urban Institute, in 2014, 32.2% of adults aged 68-72 carried debt in addition to a mortgage or a credit card, and 18% of Americans age 73-77 still have an auto loan.

Even student loan debt, a debt typically associated with millennials, is causing angst among seniors. According to the debt styles study from the Urban Institute, as of 2014, 2%-4% of adults aged 58 and older carried student loan debt. It’s a small proportion overall, but the burden is growing over time.

According to the Consumer Financial Protection Bureau, in 2004, 600,000 seniors over age 60 carried student loan debt. Today that number is 2.8 million. Back in 2004 Americans over age 60 had $6 billion in outstanding student loan debts. Today they owe $66.7 billion in student loans, more than 10 times what they owed in 2004. Not all that student debt came from seniors dragging their repayments out for 30-40 years. Almost three in four (73%) older student loan debtors carry some debt that benefits a child or grandchild.

Even co-signing student loans puts a retirement at risk. If the borrower cannot repay the loan on their own, then a retiree is on the hook for repayment. A co-signer’s assets that aren’t protected by federal law can be seized to repay a student loan in default. Because of that, Ross says, “We never advise a person to co-sign on a student loan. Never!”

How older Americans can manage debt

High debt loads and an impending retirement can make a reasonable retirement seem like a fairy tale. However, an effective debt strategy and some extra work make it possible to age on your own terms.

Focus on debt first.

Carroll suggests older workers should prioritize eliminating debt before saving for retirement. “Several studies have shown a direct correlation between debt and risk of institutionalization,” he says. Debt inhibits retirees from remodeling or paying for in-home care that could allow them to age in place.

Downsize your lifestyle

As a first step in eliminating debt, seniors should check all their expenses. Some may consider drastic measures like downsizing their home.

Cut off adult children

Even more important, seniors with debt may need to stop supporting adult children.

According to a 2015 Pew Center Research Poll, 61% of all American parents supported an adult child financially in the last 12 months. Nearly one in four (23%) helped their adult children with a recurring financial need.

Wanting to help children is natural, but it can leave seniors financially frail. It may even leave a parent unable to provide for themselves during retirement.

Work longer

Older workers can also eliminate debt by focusing on the income side of the equation. For many this will mean working a few years longer than average, but the extra work pays off twofold. First, eliminating debt reduces the need for cash during retirement. Second, working longer also allows seniors to delay taking Social Security benefits.

Working until age 67 compared to age 62 makes a meaningful difference in quality of life decades down the road. According to the Social Security Administration, workers who withdraw starting at age 62 received an average of $1,077 per month. Those who waited until age 67 received 27% more, $1,372 per month.

Retirees already receiving Social Security benefits have options, too. Able-bodied retirees can re-enter the workforce. Homeowners can consider renting out a room to a family member to increase income.

Consider every option

If earning more money isn’t realistic, a debt elimination strategy becomes even more important. Ross recommends that retirees should consider every option when facing debt, including bankruptcy. He explains, “A 65-year-old, healthy retiree would be well advised to pay down the high-interest debt now. Alternatively, an 85-year-old retiree facing significant health issues is better off filing bankruptcy or just defaulting on the debt. For the older person, their existing assets are a lifeline, and a good credit score is irrelevant.”

Don’t take on new debt

It’s also important to avoid taking on new debt during retirement. “The only exception,” Ross explains, “[is taking on] debt in the form of home equity for long-term medical care needs, but then only when all other reserves are depleted and the person has explored all forms of government assistance such as Medicaid and veterans benefits.”

Every senior’s financial situation differs, but if you’re facing financial stress before or during retirement, it pays to know your options. Conduct your research and consult with a financial adviser, an elder law attorney, or a credit counselor from the National Foundation for Credit Counseling to choose what is right for your situation.

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.

Hannah Rounds
Hannah Rounds |

Hannah Rounds is a writer at MagnifyMoney. You can email Hannah here

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Maximize Your Retirement Savings with IRAs

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Americans don’t like to think about retirement. According to a recent report by the Federal Reserve, 6 in 10 respondents who aren’t retired yet and have a self-directed retirement plan, such as an individual retirement account (IRA) or a 401(k), don’t feel comfortable making investing decisions.

This discomfort with key retirement decisions can be blamed in part on the fact that many Americans don’t have the right savings strategy for retirement. Let’s take a look at some scenarios of hypothetical savers that could provide you with novel IRA saving strategies.

Picking the right IRA for your retirement savings

401(k) accounts provide millions of Americans with a retirement savings account. Still, not everybody has a 401(k) — and even those who do have one should complement it with an individual retirement account (IRA).

Given you have a limited amount of income at your disposal to sock away for retirement, what kind of IRA would work best for you depends on your individual situation. Here’s a few scenarios for different kinds of savers, providing a combination of accounts that play to the strengths of their financial situations.

IRA retirement saving strategy: Entry-level office worker

What you need to do: You may have to endure endless status meetings and office birthday parties for coworkers you barely know, but at least you have a 401(k) with an employer match. You should set your contribution to maximize your employer’s 401(k) match and open a Roth IRA in order to tax advantage of your biggest asset: your potential future earnings.

Why you need to do it: Employers who match your contributions to your 401(k) are essentially giving you free money. Even if you’re working for a modern day Mr. Scrooge who doesn’t give you a match, a regular 401(k) account still allows you to make contributions directly from your paycheck before any tax is applied, and those contributions will remain safe from the IRS until you begin taking your withdrawals decades later.

As an entry-level office worker, you’re probably not making a lot of money, and that likely puts you in a lower tax bracket. By the time you’re ready to take your withdrawals, you may discover the money you saved by avoiding taxes isn’t worth the bigger bite Uncle Sam takes now that you’re a member of the country club crowd.

To see this in action, take a look at the income tax brackets for tax year 2019. Even if we make a generous assumption regarding your salary as an entry level office worker and say you earn more than $39,475 (but less than $84,200) a year, you still would only be taxed 22% on this income. That means the money you contributed to your 401(k) was sheltered from this 22% tax, and you face tax payments when you withdraw it in retirement, decades later. If you were a retiree taking withdrawals this year and making, for example, more than $160,725 (but less than $204,100) you could be paying up to 32% on money you withdraw from a 401(k).

Contributions to a Roth IRA are not sheltered from taxes, meaning you pay taxes on all your income and then make your Roth contribution, while the interest earned in the Roth is tax-free. Because you’ve already paid income tax on Roth IRA contributions, you aren’t taxed again when you take your withdrawals from the account. Anyone who expects to find themselves in a higher tax bracket when they’re ready to retire should open a Roth IRA now, as you can reap extra tax benefits from your current status as a lowly office drone.

IRA retirement saving strategy: Self-employed freelance worker

What you need to do: Whether you’re making enough money from your Etsy shop to avoid the 9-to-5 office grind or you hop between projects as a freelancer, the freedom of self-employment comes with non-trivial costs. But you don’t have to sacrifice your retirement savings just because you don’t have a 401(k). On the contrary, you need to look into opening a Simplified Employee Pension (SEP) IRA and a Roth IRA.

Why you need to do it: A SEP IRA is a retirement account that’s easy to set up and has low, or often zero administrative fees, which are big advantages for the busy freelancer. It also allows you to contribute up to 25% of the gross annual salary you make from the business (which as a self-employed freelancer usually works out to about 20% of your adjusted net income), up to a limit of $56,000 in 2019. That far outstrips the $6,000 contribution limit on traditional and Roth IRAs for those under 50 years of age, making it a powerful saving tool for your retirement.

However there’s no Roth version of a SEP IRA, meaning all of the contributions you make to it will be taxed when you start making your withdrawals — at whatever tax bracket you happen to find yourself in. That’s why you may also want to open a Roth IRA so you have a source of money you can withdraw tax-free.

IRA retirement saving strategy: Bold market expert with money to burn

What you need to do: When it comes to saving for your retirement, we generally advocate for a slow and steady approach. However, if you don’t have confidence in traditional investment assets such as stocks and bonds but are brimming with self-assurance about your ability to judge non-traditional investments such as real estate, you can open a self-directed IRA.

Why you need to do it: Because you’re convinced you need more flexibility in your investments than a gold medal gymnast, you want a tax-advantaged account for your holdings in peacock farms, marshmallow factories, and yacht fleets. In short, you want to make sure you’ve diversified your investments to such a degree that even if the unthinkable happens and the market permanently implodes you’ll have a safe haven of funds.

If you go down this route, pay attention to the additional pitfalls that come with a self-directed IRA, such as the fact that you won’t have a team of financial experts vetting the quality of your investments and that you can inadvertently disqualify your IRA of its tax advantages if you gain a direct financial benefit from one of the IRAs investments (beyond the money it earns for your IRA).

The bottom line on IRAs

None of the three scenarios outlined above will likely fit your unique financial situation to a T, but it should prove a good starting point for you to think about how an IRA can work into your overall retirement savings strategy. Putting away any money at all is better than nothing, but when it comes to the savings that will fund your golden years, “better than nothing” may not be good enough. Make sure you’re doing everything you can to make sure your IRA is A-OK.

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.

James Ellis
James Ellis |

James Ellis is a writer at MagnifyMoney. You can email James here

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Everything You Need to Know About 401(k) Matching

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

You probably know that 401(k) accounts are how your employer helps you save for retirement, but did you know that many employers match your 401(k) contributions? Taking advantage of 401(k) matching is one of the best ways to boost your retirement savings. After all, it’s free money.

Unfortunately, most 20-somethings in America aren’t even meeting the $19,000 401(k) contribution limit for 2019, averaging only about $11,800 in contributions, according to a study from CNBC and Fidelity. Around 42% of Americans aged 18 to 29 don’t have any retirement savings to begin with, the study found.

If you find that you’re not meeting your contribution limits, read on to get a handle on how 401(k) matching works and why it’s something you should be taking full advantage of. We’ll explore some real-world situations and get some tips and tricks from experts. Be sure to also check out our complete guide to maximizing your 401(k).

How does 401(k) matching work?

For the uninitiated, 401(k) matching is when your employer makes contributions to your 401(k). Your employer puts money into your 401(k) along with you — “matching” your contribution — up to a certain amount, and with certain conditions.

There are two main employer approaches to 401(k) matching: partial matching and dollar-for-dollar matching. In addition, you need to be aware of 401(k) vesting.

Partial 401(k) matching

Partial 401(k) matching is a common employer strategy. Much like it sounds, this is when employers match a portion of an employee’s contribution, rather than matching it 100%.

For example, your company could choose to match 50% of your contributions up to 6% of your salary. So if you contribute 4% of your salary, they’ll contribute 2%. To maximize your employer’s policy, you’d have to contribute 12% of your salary to your 401(k) to get them to contribute their max 6%. Another partial match example may look like a 100% match for the first 3% and a 50% match on your contributions above 3%, up to 5% of your salary.

Dollar-for-dollar 401(k) matching

A dollar-for-dollar 401(k) match is when your employer elects to match 100% of your own contribution. So if you contribute 3%, they’ll also contribute 3%. However, there’s still usually a limit to how much they’ll match. Let’s say your employer match maxes out at 5%. To get as much out of their policy as you can, you’ll want to contribute 5%. If you contribute any more, any excess above 5% won’t be matched.

401(k) employer match vesting

When you’re checking out your employer’s match policy, look for any mention of vesting. If there is a vesting schedule, that means your employer’s contributions aren’t yours immediately. Instead, you have to wait anywhere between one and three years for the money to be yours.

For example, an employer could allow you access to 33% of your match contributions after you’ve been at the company for a year, another 66% after two years and then the full 100% after your three-year mark. Some companies might even make you wait for three years for 100% vesting. It’s important to check your company’s vesting schedule early on.

No matter what steps you take to maximize your employer’s 401(k) matching, it could go down the drain if you don’t double check that vesting schedule. Be proactive and always look for any vesting policies. If you don’t, you could end up losing your match.

Always ask about your employer’s 401(k) matching policies

Not all employers offer 401(k) matching. Even if they do, employers aren’t always upfront about what they match. That was certainly the case for Robin, a pollster in Washington D.C. “When I began working at a startup company, there was no employer-match program,” she said. “However, I later found out that a program had been put in place that I had not been aware of.”

Only after we reached out to Robin, who declined to give her last name for this article, about her experiences with 401(k) matching did she find out about her company’s new matching system. “This policy was not made clear to me when it was rolled out, and I’m unsure how it was communicated to existing employees,” she said.

Be sure to ask about your company’s 401(k) policies upfront. If Robin’s situation is any indication, it may also help to periodically check in on those policies, as they may have changed. It’s important to educate yourself on what 401(k) matching looks like and what to look out for.

Expert tips and tricks for 401(k) matching

Sometimes it takes an expert’s opinion to jolt you into action. You may already know that you should be contributing to your 401(k) and using that employer match. But take it from these financial experts, it’s pretty easy to change your behaviors and keep from missing out on such a big reward.

Do not assume you don’t make enough money to contribute to your 401(k)

“Many times, individuals overestimate the impact that setting a 401K deferral rate will have on their tax home pay,” says Edward P. Schmitzer, CPA/PFS, CFP® and President of RCA Wealth.

Schmitzer suggests running some numbers to see the actual impact a 401(k) contribution might have on your net take-home pay. You can even chat with your payroll manager to help you. That way, you can compare your current paychecks to what they could look like. “People are often surprised on how little their net goes down due to the tax savings of a deferral to the 401(k),” said Schmitzer.

Find out how often your employer 401(k) match is paid

“This is one of my best tips” said Liz Gillette CFP® at MainStreet Financial Planning, Inc. Many employers match on a paycheck-by-paycheck basis. So if their cap is set at 4%, that means they’ll only match up to a maximum of 4% of each paycheck.

“When an eager saver changes their contribution rate, and perhaps adds a larger than usual payment, they are often leaving money on the table,” she said.

For 2019, you’re allowed to contribute a maximum of $19,000 into your 401(k). If you set up your elections so that you meet that maximum before the end of the year, you’re missing out on employer match for the rest of the year’s paychecks.

Take this example from Robert J Falcon, CFP®, CPA/PFS, MBA at Falcon Wealth Managers, LLC. An employee making $190,000 sets up a 10% 401(k) contribution rate, hoping to defer the max of $19,000 for the year. Let’s say that employee gets a promotion and a 10% raise on January 1, but does not reset their contribution rate.

Since the company is matching max 4% per paycheck, in the new year, the employee will reach their $19,000 contribution max in November, missing out on a complete match that month, and they won’t receive any company match in December.

The employee could have maximized the employer match by reducing their contribution rate to 9%. That way, they would still come very close to the $19,000 contribution limit in December while also snagging the match throughout the full year as well.

What to do if you can’t afford your 401(k) employer match

Start by putting as much into the 401(k) as you can afford, regardless of getting a full match or just a partial match, suggests Schmitzer of RCA Wealth. With each raise you receive, increase the savings rate 1% to 3% at the same time that the raise takes effect.

According to Mark Wilson, APA, CFP® and President at MILE Wealth Management LLC, making 401(k) getting even a partial matching contribution is one of the few no-brainers of investing.

“Change your 401(k) contribution amount to 3% or 5% and commit to this for three months,” said Wilson. From his experience, few people ever notice the difference. “Most will be surprised at how easy it is to start accumulating. Free money and early compounding make a big difference.”

If you have a dual income household and share finances with your partner, you’ve got room to maneuver. Christopher R. Wells, CFP® and founder of Flourish Financial Planning, starts by figuring out which spouse’s plan has a better match. “I maximize that contribution,” said Wells.

For example, let’s say your company matches 25% of your contributions, but your spouse gets a 100% match. In that case, reduce contributions to your plan and maximize contributions to your spouse’s plan.

The 401(k) takeaway

No matter your situation, there are ways you can take advantage of your employer’s 401(k) matching. It’s an easy way to boost your retirement savings without much more effort on your part. Be sure to ask questions and clear up any confusion at the start. That way, you know just what kind of vesting schedule and limits there might be. Even if there is no match, you’ll know sooner, rather than later, that you’ll need to start up your retirement savings elsewhere.

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.

Lauren Perez
Lauren Perez |

Lauren Perez is a writer at MagnifyMoney. You can email Lauren here