Managing debt while in retirement

Shed that debt or expect decreased lifestyle quality, says Alan Klayman

By Alan Klayman

Maturing Loans

Alan Klayman, creator of MyIncomeStrategy.com, is CEO of Klayman Financial LLC. He served as a vice president at Fidelity Investments, worked as a financial planner for American Express, and built fixed income strategies on Wall Street at The First Boston Corporation. Ask a question.

Dear Maturing Loans,
I have carried credit card debt all my life, but now that I'm retired, how can I manage the debt while still maintaining my lifestyle?
-- Charles

Dear Charles,
You ask an interesting question that implies a set of assumptions:

1. You are carrying debt with you into retirement.
2. You are looking to maintain a lifestyle.
3. You have not yet figured out how much lifestyle you can afford in retirement (otherwise you would not be asking "how can I manage the debt?").

First you must decide how much you can afford to live on. Then you need to decide upon an income strategy that works for you and take a close look at reducing your credit card debt that will help you maintain, or even improve your lifestyle in retirement. There are a variety of income strategies to choose from. You need to find the best one where your likelihood of success is highest, is easy to understand, where you can retain your principal, and have the lowest chance of running out money during your lifetime. You will also want an income strategy that will offer you the greatest choice of investment options. To set up an income strategy, I suggest you visit with a financial planner.

A word of warning: The most common and riskiest income strategy is to withdraw money on a monthly or a frequent periodic basis to finance your income need. This is called a market withdrawal strategy. Due to the ups and downs of the stock, bond, real estate and other markets, this becomes a very risky proposition. Why? Because when you sell in a declining market, you end up with less to work with. There are plenty of other types of income strategies that give you a higher likelihood of success than the market withdrawal strategy, and again, these you need to explore with a financial professional.

So, back to your question: It appears you have a rough idea of what you need to maintain your lifestyle. So let's assume you want to live on $65,000 a year (it could be any number, so I picked one out of a hat). First, subtract the amount you already have in income. Let's assume this number is $40,000 between Social Security and pensions. This leaves us with a need of $25,000.

Using the riskier market withdrawal strategy, we take $25,000 in income needed and divide by 4 percent. Withdrawals in excess of 4 percent of your investment portfolio become dangerous due to the risk of selling in a bad market.

$25,000 divided by 4 percent = $625,000.

If you have less than $625,000 in savings and investments, then it is time to rethink "maintain my lifestyle" and start working on, "How much can I afford to live on?"

Let's assume you do have the amount needed in this example, which is $625,000 in savings and investments. Your "How can I manage the debt?" question becomes a "How can I eliminate the highest cost debt I have?" (The highest cost debt is debt with the highest interest rates and fees.) You'll want to drastically reduce this high cost debt by setting up a program to start aggressively paying it down. When you get done paying this down, every month you are NOT paying interest costs there is more money available to spend on other things like food or travel, or whatever it is you want to do to "maintain your lifestyle."

So to recap: 

1. Find out the amount you need to live on to maintain your lifestyle.
2. If you can't find out how much you can live on,
    •  Select a retirement income strategy that gives you greatest chance of success, is easy to implement and gives you investment flexibility,
    •  Pay down your highest cost debt, which frees up excess dollars to help you maintain your lifestyle.

See you back here next week, ready to answer your questions.

Alan Klayman is creator of MyIncomeStrategy.com and CEO of Klayman Financial LLC. Klayman specializes in retirement income planning, business management and planning, estate planning, tax-advantaged investing, trust investment management, professional money management, insurance and annuities, mutual funds, fixed income securities, and institutional and personal retirement plan administration. 

Send your question to Alan.

Published: April 9, 2008