Retirement: Should You Save/Invest or Pay Down Debt?

By
Mortgage and Lending with Shop Reverse Mortgages

When one enters retirement, they often are faced with a very important choice. Should you save money/invest or should you pay down debt? This questions is really individual based so we will take a look at what makes the most sense from a financial perspective. 

Recently, an article on MarketWatch shows that the average household family in America has over $120,000.00+ in debt. What is more interesting is the average interest rate because they peg the number at $6,600.00 per year in interest! That is $550.00 per month just in sheer interest. Not touching any principal whatsoever. 

For those on a fixed income, this can be a free cash flow killer. Eating monthly disposable income to feed the financial institutions will not make your retirement a breeze. Therefore, a logical conclusion would be to pay off any toxic debt. Specifically those with high interest rates. If you are fortunate enough to hold a strong credit history, transfer balances to 0% cards and pay them off each month. Never spend more than you afford. 

However, if your introductory 0% offer has not vanished and is a thing of the past, you will want to check your interest rate. Some go to an APR of over 20% per year! 

The average returns on safe investments is usually around 1-2% per year. Even if you are making a solid 5% per year and have a 10% interest rate, you are 5% negative each year. 

The conclusion: Pay down toxic debt to avoid paying thousands upon thousands in interest each year. 

Reverse Mortgage to the Rescue

If you are just making minimum payments even at an APR of 10%, it will take you many, many, years to become debt free. This is why many in retirement are looking to reverse mortgages. They help in two different ways.

First, you eliminate your mortgage payment. This frees up cash to pay down toxic credit card debt.

Second, you will be able to cash out some of your equity without a mortgage payment. Utilize this cash to pay off high interest rate debt. 

Be very careful not to fall back into the "debt trap" after you pay off your cards. Only spend what you can afford in cash. This way, you have a permament solution to staying debt free and not having your hard earned money going to financial institutions. 

 

 

Comments (4)

Ronald DiLalla
Century 21 Discovery DRE 01813824 - Anaheim, CA
No. Orange Cty Real Estate

Good morning Andrew,  accomplish all three equally...Thanks for sharing with us.

Dec 19, 2015 03:11 AM
Andrew Kleinmann
Shop Reverse Mortgages - Boynton Beach, FL
We shop reverse mortgage brokers & lenders.

Good morning Ronald DiLalla , while all 3 sounds like the most logical approach, mathematically speaking, if one is paying $550 per month in interest alone, that is a devastating amount of money not being utilized correctly (if that debt was paid off, that is $550 a month that can be saved or invested).

If one were to just save that money, they are prolonging the time period that they are paying interest and chances are, if one is saving, and investing, they are just making minimum payments on their credit cards. Certainly holds true if on a fixed-income that you can't spread that money to wide. If this is the case, one can expect to pay that interest for the next 25 years on average (if making minimum payments on a high APR card). I'd have to disagree with any advice other than paying down that toxic debt. 

Even if they were to invest, the standard investor cannot beat what is often the average APR of credit cards (15%-20%). 

My recommendation based off mathematics without emotion, remains is to get rid of toxic debt with high APRs first.  

Even though I disagree, I do appreciate your comment and thanks for stopping by!

Dec 19, 2015 03:26 AM
Patricia Kennedy
RLAH Real Estate - Washington, DC
Home in the Capital

Andrew, I think that reverse mortgages could be helpful to many retirees. My only criticism is that I have been unable to find any good information on how they actually work without getting into application mode.  Any suggestions?

Dec 19, 2015 04:45 AM
Andrew Kleinmann
Shop Reverse Mortgages - Boynton Beach, FL
We shop reverse mortgage brokers & lenders.

Hi Patricia Kennedy , thank you for stopping by. Yes, it can be rather difficult to find this information. You bring up a great point and this is something I will blog about on our website or create a page specifically for this. I will drill down on how they work without getting into application mode. Feel free to follow me and i'll be sure to reference the "How Reverse Mortgages Work" page I will create.

In the meantime, here are some great resources that should give you a good idea about reverse mortgages which shows both the good and the bad. Despite this being my business, I will never say reverse mortgages are perfect for everyone. There are certainly pros and cons, depending upon the individuals specific situation. 

Reverse Mortgage Pros and Cons - http://www.shopreversemortgages.com/reverse-mortgage-pros-and-cons/

Top 10 Reverse Mortage Myths - http://www.shopreversemortgages.com/top-10-reverse-mortgage-myths/

Dec 19, 2015 07:59 AM

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