Our topic on this episode of the Ready for Retirement podcast is how to handle your debt and investments before retirement. It seems like there is a constant tension between paying off debt and contributing to investment accounts when you have extra cash flow. How do you know which is the right decision in the long run?
James outlines several crucial considerations as you develop the strategy that will work for you, starting with understanding the specifics of the debt you are paying off and taking a look at your actual cash flow to see how quickly you could pay debt down and how much you have available to invest. It is also important to keep in mind all of the places you could have your money, from contributions by you and your employer to retirement and HSA accounts to paying off debt. While it might seem like these decisions are black and white, there are also behavioral aspects that impact how aggressively you will pursue your strategy.
It is also imperative to keep in mind the volatility of the market and plan out some contingencies for sticking to your retirement plan if the market conditions are not ideal. Research has shown that starting at a 4% withdrawal rate is typically sufficient to avoid outliving your money but sticking to that safe withdrawal rate may not always be easy. Overall, the biggest consideration is asking yourself what will bring you the most peace of mind in retirement and how to structure your pre-retirement decisions to align with the retirement you want.
Key Points:
- Understand what type of debt you’re considering paying off
- Different terms, rates, monthly payments
- How credit card debt differs from mortgage or car payments
- There is less pressure on your portfolio in retirement if you pay debt off
- Look at your cash flow
- Do you have any extra?
- This dictates how long it will take you to pay off debt
- Then you can decide how much to invest
- Where can you put your money?
- Free money: Employer contributions to retirement accounts, HSA
- Max out your retirement account employer match
- Max out your retirement account employee contributions for tax benefits
- Pay off debt
- Understand the behavioral aspect
- Momentum
- Examine your risk tolerance
- Other considerations
- Your pre-retirement salary is not subject to market changes like your retirement portfolio will be
- Not exceeding a 4% withdrawal in the first year of retirement, regardless of the market
- What will bring you more peace of mind?
Timestamps:
0:38 – Is it better to invest surplus money before retirement or pay off debt?
1:24 – James’ personal bias
2:33 – The first consideration
6:07 – The second consideration
7:48 – The third consideration
11:29 – The fourth consideration
16:40 – Quick summary
17:10 – Additional considerations
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