Establish retirement priorities when paying off debt
By Alan Klayman
Maturing Loans
Alan Klayman 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. At CreditCards.com, he writes Maturing Loans, a weekly feature in which he answers readers' questions about retirement and debt issues.
Dear Maturing Loans,
I appreciate your help. I am presently paying 28.99 percent APR on $4,500 worth of credit card debt with a Chase Visa card. Is there any way to transfer the debt to a better card? I do not know my FICO score, but imagine that it is average at best. I am also paying about $500 a month in back taxes to the IRS and the State of New York. Our adjusted gross income will be about $125,000 in 2008. Much of that is from a pension plan. Unfortunately, I have had to dip into my retirement savings since retirement in 2005. What should be my priorities as far as what to pay back first? My wife and I are making inroads in paying everything off, but it has been difficult. We also have about $400,000 in equity in our house with $75,000 left on our 30-year mortgage. Thanks for your advice. -- Tom
Dear Tom,
The good news is that you are making progress in paying everything off. If you haven't done this already, you should make sure you have contacted every single one of the carriers with whom you owe money. Make sure you have negotiated an appropriate settlement. It appears that you have done this with some, like the government, but you may not have done this with all of your creditors, like the credit card companies. Since you are paying everything off, you would hope that your credit score is improving. An increasing score helps will keep your future interest payments down.
You are entitled to a free credit report each year. If there are any legitimate errors on your credit report, you can request a correction from each of the credit reporting agencies. However, you cannot change things on your credit report that are correct, such as late payments or defaults. Keeping tabs on your score and taking steps to clean up errors can improve your credit score, and possibly lower the interest payments that others may charge you. If you need help understanding the information, CreditCards.com has an interactive sample credit report that explains the various items you can expect to see.
If your efforts to clean up your score are effective, you will have more bargaining power when requesting an interest rate reduction from your credit card company. Either way, it can't hurt to call up Chase and ask for a lower interest rate. If Chase is not amenable to the idea, you should look at 0 percent interest balance transfer credit cards that will help you accelerate your payments.
When you lower your interest payments and eliminate your debt, then hopefully you should be able to stop dipping into your retirement savings and start building that back up again.
In order to do this, here are two important things you should do.
1) Pay down debt. If you pay $1,000 a month on your credit card debt at 28.99 percent, and get your interest rate decreased to 10 percent, your required minimum payment will decrease. However, it is important you do not decrease your payment; keep payments high so you can pay off the debt quickly. So, keep paying the $1,000 a month and get rid of the debt. The only caveat to this is if you are using retirement funds to pay down your debt. If so, then reduce your payment accordingly so that you do not have to withdraw retirement funds, but are still paying more substantially more than the minimum required payment.
When you are finished paying the IRS $500 a month, and if you are not using retirement funds for this payment, then apply that $500 to any other debts you have and watch them reduce much more rapidly.
2) Have the right retirement income plan. Since you are using retirement dollars now, and in the future you will most likely use some of these to live on, you must have the right income plan. Stay away from the 'common' plans that have you sell off assets from fluctuating investments. Every time you sell a variable asset like a mutual fund, for example, and the market is down, you are paying more than you should for the same amount of dollars. It's kind of like paying higher credit card interest when you could be using a lower one. It's best to construct a plan that gives you income from stable investments with a fixed monthly income and use variable growth investments to offset inflation and give your money time to grow. Here is a link to a free strategy selector tool to get you started.
Thanks for the question. See you here again next week.
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.
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