Aging Options

Dipping Into Retirement Savings Too Soon Leads to Debt

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A pair of articles we recently discovered on a website called “AZCentral” (part of the USAToday network of news outlets) seems to reinforce the idea that the financial outlook for many retirees can best be described as precarious. These articles, written by reporter Russ Wiles, suggest that too many pre-retirees are tapping their retirement savings far too early as a ready source of emergency cash – while too many of today’s retirees are heading into their so-called golden years burdened with too much debt.

In late April, Wiles wrote this article about the problem of what financial advisors call “leakage” from retirement savings.  “[Leakage] describes money that, for various reasons, gets removed permanently from Americans’ 401(k)-style accounts and Individual Retirement Accounts — well before retirement age,” Wiles writes. According to a recent Boston College study, leakage erodes about 25 percent from the value of the average IRA. The study authors quoted in the Wiles article observe, “This reduction would not be a concern if people were oversaving, but the evidence suggests they generally are not.”

Lack of Cash Means Lack of Savings

In the words of the AZCentral article, some think lack of financial literacy may be part of the problem. “Financial advisers, employers and others spend plenty of time and effort encouraging Americans to save,” Wiles says – however, “they sometimes neglect to warn people not to touch the money they already have accumulated.” This theory assumes that, if people only comprehended how much early withdrawal is costing them and how much future investment opportunity they were missing, they would leave their retirement money alone. But a greater reason for IRA leakage, especially among younger workers, seems to be a lack of other sources of emergency savings. “The underlying problem for leakage is that many people just don’t have much liquid cash on the side,” says Wiles. “So when an emergency strikes or a major expense looms, such as a vehicle repair or non-covered health procedure, they turn to their retirement accounts.” This can happen at any time during an employee’s work life but seems especially common when workers change jobs: instead of leaving their 401(k) on deposit, they decide to cash it out, pay the penalty, and use the money for bills and other expenses.

We won’t go into the details here but the AZCentral suggests that borrowing against your retirement account may be a far better option than taking a permanent withdrawal. While this may be true, it seems to us that before you take that step you need to sit down with a trustworthy financial planner who will help you review all aspects of your financial health, including your level of indebtedness. If you fail to build a strong financial foundation early on, you’ll be digging a deeper hole for yourself later in life.

Half of Older Retirees Have Debt

The high number of retirees carrying debt with them into retirement is the topic of this second AZCentral column, also written by Russ Wiles, that appeared just a few weeks ago. Wiles calls retirement debt “the new normal” as he reports that “the proportion of older people with debt has been rising over the past decade or so, especially among those 75 and up.”  His column cites a new analysis of stats from Federal Reserve figures showing that almost half of retirees aged 75 and up now carry some debt, a percentage that has roughly doubled since 1992. Lower-income seniors appear to have been hit the hardest by the burden of debt, but it can affect almost any retiree, some of whom saw job loss and savings erosion during the recession of the last decade. What’s more, while the average senior’s debt load may seem fairly modest at about $21,000, that amount can appear enormous for someone on fixed income. “People in the 75-plus group typically aren’t working,” Wiles writes, “so they don’t have many opportunities to boost their incomes.”  He also points out that a $21,000 debt looks even more mountainous when stacked up against the average Social Security retirement benefit which today is below $16,500. (Mortgages, followed by credit cards, are the chief categories of debt. Student loans appear to affect mostly younger retirees – either their own student loans or debts they assumed on behalf of children or grandchildren.)

The messages from these twin articles seems crystal clear: save money in retirement accounts while still working; leave those funds alone; and do all you can to avoid debt. But there’s a fourth message we at AgingOptions want to add – the fact that money alone will never solve all your retirement problems. We’ve said hundreds of times that financial planning is not the same as retirement planning, and as good as the advice may be from articles like the ones we’ve just described, getting your financial house in order is only one component of a well-rounded, truly comprehensive retirement plan like the LifePlan offered exclusively by AgingOptions. Finances, legal protection, medical coverage, housing choices and family dynamics all must work together in your plan, just like interlocking pieces of a puzzle. Let us show you how this process works, and it will forever change the way you think about retirement planning.

The easiest way to explore the power of LifePlanning – without obligation – is for you to attend an AgingOptions LifePlanning Seminar featuring Rajiv Nagaich. You’ll find a complete listing here of all the seminars currently scheduled; then select the event that works best for you and sign up on line. Call us during the week if we can answer any questions or provide further assistance. Do what thousands have done and come to a LifePlanning Seminar soon. It could be the most important few hours you’ll ever spend when it comes to planning for your future. Age on!

(originally reported at

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