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How to retire credit card debt when you do

Make a plan to pay it off and stick to it

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.

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Question for the CreditCards.com expert

Dear Maturing Loans,
I'm 62 and starting to see retirement on the horizon. I plan on bowing out in three years to pick up my pension. I have usually carried a credit card balance, but I think I've been smart about it, getting a series of 0 percent balance transfer cards, so my interest costs are nonexistent. I have enough money to live on for a while, but need to get a handle on how I can make it until 70 when Social Security kicks in. I know the standard wisdom of financial planners is to enter retirement with no debt, but I think it would take almost five years to pay off these credit cards. What should I do? Should I carry the debt into retirement?
-- Wilbur

Answer for the CreditCards.com expert

Dear Wilbur,
Congratulations. You have a good handle on your situation and are thinking about what to do now, three years from now and even longer. We are looking at two fundamental questions: 1) how do you get to 70 when Social Security kicks in, and 2) is it smart to continue to carry debt into retirement?

Part of question No. 2 is that you want to know if you should carry the debt or pay it down. I understand that you do not have any other high interest debt, so you are doing a great job.

Let's take a look at your situation a little closer. In three years, you will start collecting a pension. It will take five years to pay down the credit cards with your current and future income. In eight years, you will have an additional income source, collecting Social Security. 

It is important to protect your income in case of an emergency, health crisis or if you encounter a large unexpected expense. Since you are being diligent, one thing you want to look at is making sure you have adequately protected your income for the future. If you have not looked into long-term care insurance, then this is the time to do it. There are many different types of plans out there so be careful. I suggest using an independent agent that can look at many different carriers and compare different plans for you.

There are many questions this brings up, including if are you eligible, if are you inclined to take the protection, its cost and how you would pay for it. I can't answer the first two questions, but I can address the second two. If you have some room to spare in your disposable income to pay down your credit card debt, then you most likely have the room to pay for a long-term care policy. Of course, you have to look at the actual numbers and do not want to take on an additional expense you cannot afford. So be as diligent with this expense as you have been with all other expenses.

If you cannot get or do not want long-term care insurance, then I suggest paying down the credit card debt over the five-year time frame you introduced in your question. This will free up disposable income two years into your retirement.

If you want and are eligible for long-term care insurance, then I suggest coordinating those long-term care insurance payments with reducing your debt. In this case, an eight-year debt reduction plan would work to coincide with your receiving Social Security benefits. 

I also suggest considering an income strategy that provides payments to you over a five-year time frame. That is a program to guarantee income to you for ages 65 through 70. You can set this up in a variety of ways including: a five-year bank CD ladder, a five-year bond ladder, a money market or savings account and a five-year income annuity. All of these should guarantee your principle for five years and provide you with a steady paycheck. The rest of your money should be in a diversified portfolio that is suitable to your investment experience, risk tolerance and needs.

After age 70, your income needs may change for a few reasons. One, you will be five years older and things may be different for you at that time. Two, inflation. Three, tax laws are changing by 2010 and probably more after that. Four, you will have your Social Security kicking in, and this will reduce your need for more income under today's income need assumptions. When you turn 70, it would be appropriate for you to revisit your situation and plug in the appropriate income strategy that makes the most sense to you and your family for the future.

Along the way, you will have eliminated your debt, possibly protected all or a portion of your income from unexpected expenses, given yourself a great income strategy to follow and shown flexibility to adjust as your needs change.

Thanks again for writing. See you back here 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. 

Send your question to Alan.

Published: April 30, 2008


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