Do I pay off debt or save money for retirement? 5 questions to ask yourself

by Jim Sloan

It's an age old question. Do you pay off debt or set aside the money for retirement?

You probably already know that paying off your debt with high interest rates is a great idea. But you also probably know that a disciplined approach to saving for retirement is important. So what do you do if you only have enough money to only pick one or the other?

Some people will say that this is a simple math equation: you go with the option that saves you the most money according to a calculator. But it isn't always as easy as that to calculate or to quantify the intangible benefits associated with each of these (for example the relief it gives you to pay off debt early, or the financial peace of mind when it comes to your retirement).

Before you make the choice between savings and paying debt, ask yourself these five questions to see what the best option for you is:

1. What exactly is my debt situation?

Not all debt is bad. If you have a mortgage at 5 percent or lower you have a great rate, a tax deduction and stand a decent chance of seeing inflation and real estate appreciation lessen the impact of your long-term mortgage. This is debt you can keep.

On the other hand, high-interest credit cards and other variable rate loans can be deadly to your financial health. Even if you think you have a handle on your finances, you should do a quick rundown of all your variable rate debt. This includes student loans, lines of credit and even personal loans you may have with family and friends. Next dig down into the details. Are they fixed or variable? Are they indexed to the prime rate or a Treasury index? And most importantly, how quickly can you pay off your high interest debt if you skip or reduce retirement contributions for a few months?

2. Do I trust myself?

It is an easy question, but remember some people have to set their alarm clock ahead ten minutes ahead just to fool themselves into waking up every morning. The same principle can apply to retirement saving. Skipping a few contributions to pay off debt and then trusting yourself to make those important contributions down the road may be asking too much. And do you trust yourself to invest a future windfall or bonus into retirement savings? Or will you spend it as fast it comes?

If your worry about your self-discipline, then increasing your monthly retirement contributions becomes more important. This may mean that you may carry a little more debt than your neighbor, but you made the right decision for your situation.

The flip side is also true. If you can trust yourself to invest in retirement savings responsibly, you can be more aggressive paying off debt by forestalling or reducing retirement contributions for a short time. If you go down this path, it is preferable that you wrap up your debt-paying mission in six months or less and then go back to making your regular retirement contributions.

3. How far behind am I?

A CNBC report that aired in 2010 stated that Americans are $6.6 trillion behind in their retirement savings. Does that number include you? It is easy to find useful retirement calculators online. You enter a few numbers and voila, you get an exact answer to how far behind you are in reaching your retirement savings goal.

These retirement models are highly variable and should not cause you undue worry, but at the core their basic principle is sound. The simple fact is that investing early allows the power of compounding returns to accelerate your retirement savings over time. Run the numbers to see where you stand. It may give you an idea of how much you can afford to shave off your contributions to pay off your high interest debt.

4. Is my employer matching?

An important feature of retirement savings is the matching programs where companies match their employee's retirement contributions. This is better than free money. It is free money that compounds year after year and can make retirement possible earlier. If you are thinking of reducing your monthly retirement contribution to pay off debt, even for a short time, make sure you stay above the minimum amount required to keep receiving your employers matching portion.

5. What are my sources of retirement income?

Everyone seems to worry about retirement. A recent poll of Americans approaching 65 conducted by the AARP showed that even people approaching 65 are still worrying about their retirement savings lasting. The poll confirmed that a higher percentage of senior citizens are working past retirement age today, either for economic reasons or just to stay busy. Either way this is extra income that can change the analysis for paying off debt.

Income at retirement can include social security, pensions, annuities or even reverse mortgage payments on top of retirement distributions and paychecks for those working part-time. It is a good idea to project your retirement income and how well it is protected from inflation.

If your retirement income looks likely to fall short of what you think will need, you should focus on making extra contributions. It doesn't mean you can't pay off debt, but you can't afford to skip monthly contributions as easily as someone who has a very reliable source of retirement income.

What to look for in a financial planner for your retirement investments

by Jim Sloan

In the aftermath of the Great Recession, many Americans are uncertain about what to do with their retirement savings accounts.

Many of them have lost jobs and the 401(k) accounts that went with them, and are trying to figure out where to roll over the investments in those retirement savings accounts.

Others became disillusioned with the promise of the 401(k) savings accounts--having lost so much money when the stock market dropped--and are looking for more reliable ways to make investments for retirement. Should they just use the best savings accounts they can find? Is there a high yield savings account they should consider?

As a result of these and other questions, many people have started looking for a financial adviser to help them. It's a smart move, but finding a financial adviser can be a daunting task. Here's why:

  • Many financial advisers will only work with you if you have a lot of money--more than $500,000, for instance.
  • There are nearly 100 different professional designations for financial advisors, according to the Financial Industry Regulatory Authority (FINRA). Finding out which acronym fits your needs can be profoundly confusing.
  • There are certain duties a financial planner will perform and other jobs you'll just have to do yourself. Those who think they can hire someone and sit back and relax may be disappointed.

What to look for in a financial planner

According to Consumer Reports, there are really just four credentials you need to look for in a financial planner:

  • Certified Financial Planner (CFP): These folks have passed a 10-hour exam and have years of experience.
  • Chartered Financial Consultant: This designation requires at least eight college courses and 30 hours of continuing education each year. These professionals typically focus on insurance.
  • Certified Public Accountant/Personal Financial Specialist: These are CPAs with special training.
  • NAPFA-registered Financial Advisor: These are fee-only planners who have met the strict requirements of the National Association of Personal Financial Advisors.

What to avoid

There are many people who present themselves as financial planners, and their business cards will have an impressive list of acronyms. But many of those acronyms only camouflage the fact that the planner is really a salesperson who makes commissions by selling you products that you may or may not benefit from. Some may be outright frauds.

According to The Sacramento Bee, the three things to consider when hiring a financial advisor are: credentials, credibility and compensation.

You can check an advisor's credentials on the FINRA website under its "BrokerCheck" feature, as well as the U.S. Securities and Exchange Commission website, which lists the employment history and any customer disputes of investment advisers and firms under "investor information."

Doing your due diligence

To gauge a planner's credibility, meet with several before hiring one, and ask them each the same questions about their background, the scope of the work they will do for you and compensation. Experts usually recommend a planner who is "fee only," meaning they won't be charging you commissions. A "fee-based" adviser usually charges commissions.

You will also have to determine how your adviser will be paid, whether it's an hourly rate, a set amount for each consultation or a percentage of your total assets. This may be determined by what type of relationship you want with the advisor--a one-time investment tune-up or a long-term relationship with monthly, quarterly or annual investments reviews.

The bottom line is that you need to move cautiously. Don't make a quick decision based on someone's recommendation or a fancy string of titles. Figure out what you feel you need from an adviser and then interview several before making a choice before turning over your life's savings accounts and investments to someone.

How to keep a limping stock market from crushing your retirement plans

by Jim Sloan

The problem with most retirement planning calculators is that, regardless of how diligently you've made investments over the years, the big money may be delayed, or never come at all. The big money that you were essentially promised when you started contributing in that 401(k) back when you were 26 requires a strong assist from the stock market in the final 10 years of your working life to meet the expectations set out by most retirement calculators.

And while that lift certainly occurred for retirees and their investments in the 1990s, the same fortunate conditions have not exactly characterized the most recent decade. What the last 10 years has taught us is that even if you did everything the way you were supposed to, your retirement may not pan out the way you had hoped.

Even if you put money into savings accounts and retirement plans at a respectable rate, invested in money market accounts and diversified your portfolio, you still need your investments to double during the final years before you accept your gold watch and retire to the lawn chair.

Why is the final part of your career the most important for retirement?

We are "unbelievably dependent on the final few years," Michael Kitces of the Pinnacle Advisory Groups in Columbia, Md., recently told The New York Times.

Dan Caplinger of The Motley Fool recently reached a similar conclusion. He said the last decade of your career is the most important period of your investing life but it's also the period when you have the most to lose. He said that the period since 2000 has been difficult for even the most patient long-term investors, noting that the S&P 500 is still well below where it started in 2000 and that returns on large-cap stock investments have been "just barely positive."

Someone who saved for 30 years and entered the 1990s with $480,000 in her portfolio didn't have much trouble doubling their money in the last 10 years to reach the magical $1 million retirement mark. But in a market that delivered only a 2 percent return--such as the one we've had the last 10 years--this would leave the retiree with just $640,000.

Take control of your retirement future

What you need to do, Caplinger and Kitces say, is to take more responsibility for the outcome. Here's how:

  • Save more and create a less volatile portfolio, Kitces says.
  • Be flexible about your retirement date.
  • Save more when times are good and cut yourself a little slack when times are tough. Caplinger says you'll find the good years outnumber the bad in the long run and you'll save more.
  • Buy actual bonds from the issuer or through a broker, Caplinger says, and hold them until maturity so you can get all your money back.

If you are younger, start building up your retirement savings account now. And start saving more than the retirement calculators suggest to put yourself in a position to enjoy the compounding that a good stock market can bring--whenever that is.

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Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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