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Welcome to How to Retire on Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times. This show is about getting into the nitty-gritty so you can make better decisions as you prepare for retirement. Text your questions to 913-363-1234 and we'll feature them on the show. Don't forget to grab a copy of the book, How to Retire on Time, or check out our resources by going to www.retireontime.com.
Welcome to How to Retire On Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, health care, and more. This show is an extension of the book, How to Retire On Time, which you can grab today on Amazon, or you can get a free copy by downloading it by going to www.retireontime.com. My name is Mike Decker. I'm the author of the book, but I'm also a licensed financial adviser, insurance agent, and tax professional, which means when it comes to financial topics, we can talk about it all. Now that said, please remember this is just a show.
Mike:Everything you hear should be considered informational as in not financial advice. If you want financial advice, you can contact our team by going to www.yourwealthanalysis.com and request Your Wealth Analysis. With me in the studio today is my cohost colleague, mister David Franson. David, thanks for being here.
David:Yep. Thank you. Glad to be here.
Mike:David's gonna read your questions, and I will do my best to answer them. You can always submit your questions anytime during the week by texting them to (913) 363-1234. Again, that's (913) 363-1234, or you can email them to heyMike@howtoretireontime.com. Let's begin.
David:Hey, Mike. Walk me through paying off my credit card debt versus maxing out my IRA contributions. This sounds like it could be a question that could be even for some younger people, like working people.
Mike:Well, there's a lot of people entering retirement that will say, we got the credit card debt. We'll pay that off now finally. They just got used to keeping debt. Uh-huh. So let's first address the different layers of debt, then let's talk about the behavior of debt, and then let's talk about retirement.
Mike:So there's different layers of debt. You've got your healthy debt.
David:Alright.
Mike:They call it good debt. Good debt is when it's like your home mortgage. It's any debt associated with an asset that appreciates in value. So over the long term, should your home appreciate in value? Yes.
Mike:Good debt. Not concerned about paying it off quickly. Now you may want to, and that's okay. We'll talk about that behaviorally in just a second. Then you've got bad debt.
Mike:Bad debt is associated with an asset that is depreciating in value. Cars, credit cards, all of that. So if you have car loans, credit cards, think of it this way. You're guaranteed to pay 14 to 24% interest on your credit card debt. Guaranteed.
Mike:That's hefty.
David:Yeah. Especially compared to like a maybe a student loan or a well, some student loans, and then your home mortgage, much lower, like
Mike:single digit interest rates. Could you guarantee that you're gonna make 14 to 24% year over year in the market?
David:No guarantee. K. I think I've been here long enough to learn that. Yeah.
Mike:So paying off your credit card debt, the high yield debt, the predatory debt, whatever you wanna call it, get rid of that now before you even consider saving for retirement because you will constantly be paying that against you. Not worth it. Okay? So credit card debt, just don't have it. Then you've got your car debt, your student loan debt, and there are people preparing for retirement that still have their student loan debt.
Mike:Wow. You don't make minimum payments on debt. You make the payment plus some. So this is very nuanced when it comes to debt. There are some very loud voices about debt.
Mike:We won't say who they are. Right. Who say all debt is bad, and then they will do some religious overtones to it and say, well, the Bible says all debt is bad. I'll tell you right now, the Bible doesn't say all debt is bad. Uh-huh.
Mike:If you look at Genesis, Exodus, Leviticus, Deuteronomy, know, the original books Sure. It talks about predatory debt. All predatory debt is bad. They call it usury debt in the Bible. But then you've got other debt where one person was disadvantaged, the other had a surplus, and lent it at a reasonable rate so that the other person could lift themselves out of poverty.
Mike:That's also in the Bible. So don't high road me and say that all debt is bad. Predatory debt is bad. Here's the rule of thumb is for today's rate, if your debt is above 8% year over year, and or it's tied to a depreciating asset like a car, student loans, or just interest at that point, you pay that thing down as fast as you can. If it's tied to an asset that's appreciating value like your home or your rental properties, you can take your time on that.
Mike:That's okay. And how do you know how much should you pay off? This I can't tell you how many times I've told this to people, and they go, finally, someone could explain it the right way. Mhmm. K?
Mike:This is the actual math of it all. People like to avoid it because it's nuanced. I think most people listening to this show are highly sophisticated. They're smart people, so they'll get it.
David:Yes.
Mike:So let's say your mortgage debt or let's say your student loan debt is $2,000. I don't know what student loan debt is, but student loan debt, $2,000 a month. Oh. Okay. I I don't know.
David:That could be that's hefty, but
Mike:Whatever it is. Yeah. Okay.
David:And maybe it's more like What
Mike:does student loan debt pay? Layton, do you look it up real I didn't do student loans. Full disclosure. Yeah. Yeah, I didn't do student loans.
David:I think there's a pretty wide spectrum and and
Mike:Say a thousand bucks. Yeah. Let's say a thousand bucks, and Layton will correct us on that. But thousand bucks is your student loan debt. Okay?
Mike:And let's say that you're the beginning, so let's say that 700 of that is in interest, 300 of dollars of that is in principal.
David:Okay.
Mike:Okay? And then over time, you're paying down the principal, so it switches. Just like your whole mortgage amortization schedules. Okay? Yeah.
Mike:Alright. So you make your payments, and then you have extra funds. Let's say you've got $500 of just extra savings you could do because you're you're young, and and you don't have high cash flow, but you got $500 extra you could invest in the market, like in an IRA or something like that, or you could pay off debt faster.
David:Okay.
Mike:K? $700 of interest against you, $500 of extra savings. You want to use the $500 to pay down the debt faster until the interest against you is $500 or less. So do you see how dollar for dollar it has to equal the same before you have a conversation? I do.
Mike:That that was very well illustrated. You're looking at what's the interest against you, and what's the excess you could save. If the interest against you is higher than the excess you could save, you're paying down the debt faster. If it's the same or less, then you can make a decision. And here's my example, because I hate it when the snarky kids when I say snarky kids Mhmm.
Mike:I'm 37. I'm still a kid. Whatever. But when when self proclaimed philosophers say, well, I I could invest in the market and, you know, make 7% or 10% year over year, and why would I pay my 2%, three % loan down? Well, 10% of a thousand dollars isn't gonna help you much compared to 3% on $500,000.
Mike:Dollar for dollar, the interest against you is way worse than what you're making. So, yeah, you do need to pay down that debt faster.
David:That makes sense.
Mike:Alright. Now let's talk about retirement. When you're getting close to retirement, a common question is, should I pay down my debt faster?
David:Mhmm.
Mike:Well, you've got a dollar for dollar conversation now. You've got, let's say, a million dollars in cash. You've got a mortgage of $200,000. Okay. Well, your mortgage is 3%.
Mike:You could take 200,000, the equivalent of your leftover mortgage that's at 3%. You could take that $200,000. I don't know. Put it in a high yield savings at 4%. So you're making 1% profit every year.
Mike:It's called positive arbitrage.
David:Okay.
Mike:Dollar for dollar. So my point being is let's not confuse the young person who needs to pay off debt faster because they got in over their head with the retiree who has cash and can make other decisions. It's a different conversation. Do you see the difference there? Yeah.
Mike:Yeah. I do. Yes. So the only reason why you'd pay off your house immediately in retirement or right before you retire is because you just want the peace of mind. And if that's what you want, great.
Mike:There's no problem with that. We need to live within our emotional and economic limits.
David:Mhmm. Yeah. It sounds like when you're the older or the person nearing retirement or the current retiree, they have more options maybe than the younger folks, but that's good that you have different options, and and we don't need to be sort of siloed in the mindset of like, all that's bad. Is that the main takeaway here?
Mike:Yeah. There's no absolutes. Yeah. In finance, there's no, this is the only way. Like, no, there's nuance, there's conversations.
Mike:We are compensated by the risk that we take. So another thing too is, why would you quickly pay off your mortgage, let's say 200,000, you've got
David:a million dollars, when all that million dollars is pretax? It's like, well, that's rough. Yeah. Because then if you're basically taking $200,000 in income, right, to pay off the mortgage Yeah. That's that might be, if you're lucky and you refinanced a few years ago, like a 2% interest rate, I mean.
Mike:Well, then you got income tax, and that rate, you're also triggering IRMA. Yeah. So there's surcharges there. You might even hit the the net investment tax. So that's an additional 3% as well.
Mike:I mean, it's just you're you're hitting all the wrong things when you quickly make a decision like that. So you gotta be mindful about the tax situation, the investment situation, the cash on cash comparison of what you could do with your assets, what's the long term strategy, what your income needs in the short term future. But as a whole, again, debt is not bad. It's just an agreement. That's it.
David:I see.
Mike:As long as it's fair to everyone, I don't see really being an issue. So let me just do a quick recap. Credit card debt, pay it off, and do not keep credit card debt. Pay it off every single month. If you can't fight that addiction, that's when you cut up your credit cards and use a debit card.
Mike:Yeah. Because spending is an addiction. It is a behavioral addiction that compensates for the lack of self worth to think that you need to pose as someone better than you feel that you are. Consumerism is killing you financially. Hopefully, you can work through that.
Mike:You can work through some financial coaching, but if the credit card is an addiction to you, you get rid of it. If you pay it off every single month, then great. Use the credit card. Yeah. You know what's funny is if we all paid off our credit cards every single month, these companies would be destroyed financially.
Mike:Right. It doesn't work out unless people are not paying off their credit cards.
David:Isn't there like an industry jargon for the people that pay off their balance every month, that they don't carry a balance, that people in the banking industry call those people deadbeats?
Mike:Because they're responsible with their money. And look, things happen. Like, you might run up a credit card debt, you know, I get that things happen. Let's not be harsh about it all.
David:Yeah. Let's say your car, you have one car you depend on to get to work, and something happens. Right?
Mike:Yeah. And you might need to put it on the credit card, and then slowly make off payments or something like that. Like, I get that.
David:Sure. Nothing wrong with that.
Mike:Well, it's not ideal. You should have an emergency fund. But like, you you gotta get through life. Life is hard. I I get that.
Mike:Yes. But if you're retired, you've got a million dollars sitting in the bank that you should not be having. There you go. Credit card rollover. Yeah.
Mike:So if there's an addiction, cut the credit cards, use your debit payments. We need to have a healthier relationship with money. We need to know that money is not who we are. It's just a tool. We serve people.
Mike:We worked to receive money so that in the future, we could spend it and be served. That's how this works. And the more you serve people, the better you serve people, the more money you'll attract. And if you're a good steward over that money, then you'll have more resources so that you can be served later on in the exchange of money. That's how it works.
Mike:Debt is the manipulation of saying, I want more service now before I've served people. Interesting. Philosophical. Yeah.
David:I know. I like that.
Mike:But when you retire, it's okay to have debt, not credit card debt, not student loan debt, not car debt, but house debt is fine. When you retire, when you're saving for retirement, make sure that your house is in order, that you've got healthy cash flow, you've got capital accumulating, that your assets are growing, and once you've managed your cash flow appropriately, you've got an emergency fund, then that's when you're having the conversation about where should what go, and and why, and all that. And you don't need to necessarily max out your four zero one k, by the way, that we didn't even talk about that. Here's a quick ending to
David:this. Okay.
Mike:Max out your four zero one k. Yeah. It's nice. But how about you max out your employer contributions to the four zero one k, and then consider your other options, like doing a Roth.
David:Uh-huh.
Mike:I mean, that's that's kind of a neat option. And I'm not saying do it a Roth through your employer. Maybe you can do the max match to your Roth through your employer, or maybe you do the pretax through your employer, but maybe then go out and do a IRA contribution. Because outside of the four zero one k, you've got more investment options.
David:Yes. Yeah. Good point.
Mike:So don't max out because it's the easy way out. Get the matching, and then look at your options. That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcast. Just search for how to retire on time.
Mike:Discover if your portfolio is built to weather flat market cycles if you're missing tax minimization opportunities that you may not even know exist. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility. This is not your ordinary financial analysis. Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date. Go to www.yourwealthanalysis.com today to learn more and get started.