Analysis: MAXWELL PHIRI
LAST week we looked at how to conduct a personal financial assessment in order to come up with a Net Worth of a person.
The net worth computation should be conducted at least twice in a year and the result will tell whether you have a negative or positive net worth. In the event that the results show negative net worth it will be ideal that you start killing your debts in order to enable you retire smiling. Therefore it is very important to ensure that debts are prioritised by setting them off quickly
The single greatest threat to retirement is debt. Retirees are accumulating more debt these days than ever before due to the fact people are no longer sensitive to expenses. I have noticed the strong addiction to debts to extent that some employees even go an extra mile to borrow vegetables worth K15.00 only to be paid at the month end and yet they have the money in their pockets to buy the vegetables with cash! What is that? Debt has over blinded them. This has led to the trend where some employees retire with debts or work longer after their retirement age without creating opportunities for the young ones to take up their jobs. Debt is the single biggest threat to retirement because households cannot accelerate with their foot pressing hard on the brakes.
This is what debt does; it constricts cash flow because the household has already spent their future income in advance for a year. It is modern slavery and most employees live on hope. It is possible to have debt and save for retirement at the same time but in our easy credit society, clients have to have discipline and both cash flow and net worth needs to be trending positive. As a potential retiree you need to distinguish between ‘good’ debt and ‘bad’ debt. In isolation, all debt is bad debt. However, if you are acquiring debt, it should do at least one of the following things for you, directly decrease expenses, directly increase income, directly increase net worth, or save you from undue hardship.
As you prepare for retirement make sure that in 10 years before retirement you reduce your debt.
Pay off, car loans, education loans and any other debts you pay monthly (known as consumer debt).
If possible, pay off your mortgage.
Do not take on new debt prior to 10 years or during retirement without having a plan to repay it.
Track your spending and pay your bills on time. Talk to creditors early and often if you think you may fall behind.
Having debt is a normal way of life for many employees. But unfortunately, many are starting to carry greater amounts of debt in retirement than previous generations and this has led into many retirees being destitute as they retire with nothing but only (mau)_words that nenze munthu (meaning I was someone) and once worked in this organisation. To achieve the retirement lifestyle you will want, you need to begin reviewing your current debt practices. Identifying some debt habits and making changes to either eliminate or reduce your debt will ensure your retirement savings last as long as possible.
There is no doubt that not having any debt can give you a certain sense of freedom. When you do not owe anything to anybody, the money you have is yours to do with as you wish a great retirement dream scenario. But as we all know from experience, reality can be a bit different.
In an ideal world, none of us would have any debt ever and would certainly pay off our mortgages and car loans before we retire. But that’s not always possible and sometimes, it’s not even the best thing to do. Debt is not necessarily negative. In fact, in the financial world there’s a common distinction made between “good debt” and “bad debt.” But you have to know the difference and to keep debt from ruining your plans, you also have to figure out how much debt you can comfortably handle on your retirement income.
Debt that creates opportunities can actually work for you. For instance, with mortgages or home equity lines of credit, you are borrowing to own a potentially appreciating asset. So they fall into the category of good debt.
On the other hand, there is nothing positive about debt that is high cost, isn’t tax-deductible, and is taken to buy an asset that will likely depreciate. Things like credit card and car loans fall into the “bad debt” category. The image of taking on high monthly payments for a new car that decreases in value the minute you drive it off the garage is probably one of the clearest examples of debt that works against you. Worst still what we see is that families are now owning three vehicles and one wonders how one person can drive three vehicles at a time. Mind you a car in itself quickly depreciates as compared to a house. A house can be burnt by fire but the land will not be burnt and it will continue appreciating annually
Remember retiring debt free it is possible and you can make it!
More details on Debt Management in readiness for retirement will be availed during the seminar we are organising in December, 2017
Remember financial security in retirement doesn’t just happen.
It takes planning and commitment and Saving Matters!
The author is Director-Human Resources and Administration at the Rural Electrification Authority and seasoned pensioner advisor.