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Rid Yourself of Debt to Clear Your Retirement Path

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A cursory analysis of many retirement obstacles quickly reveals that appearances can be deceiving. Many people would say that the biggest obstacle to retirement is not having enough money. The obvious question that follows is why this is the case. This question is only the beginning of the journey. Answering that question leads to the biggest reason why many people do not have enough money saved for retirement – because they spent most of their income to pay off debt.

When they hear the word 'debt', they think of secured debts like mortgages and car loans. In reality, the debt that represents the biggest problem is consumer debt such as credit card debt. The average amount of debt for households that have credit card debt is over $15,000. Consumer debt is actually three obstacles in one.

In the first instance, saving for retirement during working years is made more difficult by the fact that a good portion of their earnings goes towards paying off debt. Secondly, unlike mortgage debt, paying off consumer debt does not go towards establishing anything of lasting value. The borrower is literally paying off creditors in exchange for a good credit rating. Finally, if the debt still exists when the borrower retires, they may not have enough money to continue paying off their debt in addition to covering their basic monthly expenses.

The online brokerage Scottrade commissioned a survey in which it was reported that 63% of Americans found repaying debts an impediment to savings. Furthermore, the survey found that 61% of all Americans thought that repaying creditors would continue to impede retirement savings in 2010.

While there is no magic bullet to rid one's self of debt, there are definite steps that borrowers can take to give themselves a better chance of becoming debt-free.

1) Turn of the spigot. The debt cannot be paid off if the borrower keeps creating more of it. This applies to all forms of debt, whether mortgage or consumer debt.

2) "Pay yourself first" has become the mantra of mantras among retirement and investing experts, but unlike most there is a lot of truth in this one. Most borrowers think that completely paying off debt before saving for retirement is the best thing to do, but this may not be the case. Even if they save only a few dollars a month, that money can still be put to work for them in a retirement account.

3) By applying Pareto's 80/20 principle to one's spending, they'll likely find that 20% of their expenses represent 80% of the actual debt pile. In other words a fraction of one's income spent on frivolous purchases results in the majority of their debt. So find those expenses and cut them out of the budget in order to start saving.


Click here to return to Amity Insurance E-Newsletter July 16, 2010.