What is Debt Recycling?

12 Replies

What is Debt Recycling? I asked myself the same question when I saw the phrase and discovered it is a rather interesting concept; especially to those that own a home.

Debt Recycling kind of reminds me of a loopty loop process in a fashionable way. The idea is to reduce you non tax-deductible interest on a debt and replace it with a tax deductible interest on another debt.

Here is how it works

Suppose a few years back, you bought the house you live in for $200,000, and now its worth $350,000. First, you would then borrow up to 80% of the equity (or $120,000) as an investment loan. The advantage here is that the loan is fully tax deductible.

Next, you take the $120,000 investment loan and put that to another investment vehicle – usually a managed plan or another property. Then, at the end of the year, the amount you repaid on your mortgage is reborrowed and added to your new investment vehicle. Make sense?

So each year you rinse, repeat and lather – equity to investment vehicle. Now, the advantage to debt recycling is that the non tax deductible mortgage is slowly being converted into tax deductible investment.

Mortgage reduction (‘bad debt’) —-> New Investment Growth (‘good debt’)

The result

When your mortgage is paid off, you can then make the decision to sell your investment and pay off your investment loan, or keep the investment and make payments, or consider taking out a new investment loan against your home and increase or start another investment opportunity (reminds me of a Donald Trump strategy).

But is it right for you?

Many people believe they need to pay off the mortgage before having enough money to build their wealth or make a substantial investment. But the problem with waiting until your mortgage is paid off – your investment will not have time to grow and mature. Debt Recycling allows you to borrow against the equity in your home and make a tax-advantaged investment that can pay off the mortgage and at the same time build you wealth.

So, even though it sounds like a good way to increase your investment portfolio, there are some things to consider before taking part in this strategy.

  1. Make sure to hire a Certified Financial Planner to help you plan for this type of aggressive financial planning.
  2. Remember, if your investment falls in value, you end up losing. Do you have the financial cushion to survive the potential losses?
  3. This is a long-term investment strategy. Do not consider investing less than 5 years of your time with this type of strategy.
  4. If the interest rates on your loans increase dramatically, the profits decline.
  5. Tax laws could change, thus damaging your strategy and anticipated profits.
  6. If you are married, consider obtaining a nuptual agreement with your spouse – you’ve seen the current divorce proceeding with the McCourts – Major league Dodger’s owner, right? Need I say more. I guess, in that case, I should say have one solid nuptual agreement.
  7. Your assumptions are not fitting the outcome. Much like starting a business, its easy to become overzealous with the potential end results. Thoroughly research your investment opportunities before leaping in. Gain a second opinion from a colleague, a different opinion could help you see all sides of the opportunity.
  8. Make sure your CFP arranges adequate insurance for income protection, trauma, or death and disability.

Debt Recycling during an unstable economy

Currently, I do not think debt recycling is the right investment planning strategy. The housing market is great for those people that can afford to invest in home forclosures; preferably with cash. There are $500,000 properties being sold for $200,000 in my area right now. I say cash to invest instead of using the equity, because my husband and I were hit hard in this economic downfall. There was a $15,000 of equity in our home that soon skyrocketed to $250,000 equity during the housing boom (that was a nice feeling). But now we were hit hard and the home is valued (minimally) upside down – Ouch.

Now if you take the equity from your home to invest it into a managed investment plan (now its sound like Warren Buffett) – buy low, sell high – could be a consideration.

I would be interested on your take about debt recycling. Neat concept. But too much at risk?

(photo credit: Shutterstock)

Financial Check Up List

17 Replies

My husband is an organized nut. If we go somewhere on vacation, he makes a list for the tasks to be completed, from washing the laundry, packing the clothes, to loading the car trunk and has them done before I get home from running errands. If he thinks the house needs to be cleaned (former Navy SeaDog), he has an organized system for making sure everything from dusting the blinds, to weeding the garden, to cleaning up the garage is done in a short, practical amount of time. And he insists that I do the same. Otherwise, he says, I’ll run in a chaotic manner because I have to much going on (He’s right. But I call it chaotically organized.)

In actuality, I am not as attentive as he is. But when I do make decide to take the lead, I do it with enthusiasm and aquire the rewards: better organization, less stress and a sense of accomplishment.

I am sure plenty of you are as busy as I am. So I took the leisure of preparing to-do list of things you should tackle this season to improve your financial situation. Reap the benefits as you accomplish each task.

Review your health-insurance options. In November, most employees are given the chance during open enrollement to make decisions about their health insurance benefits for 2011. Be sure to look closely at your options because employers will be making some changes to their plan as a result of the health-care reform.

Start a flexible-spending account for 2011. If your employer is increasing deductibles and co-payments for your health insurance, as many are, then its a good idea to start contributing to a flexible spending account. An FSA lets you put aside pretax money that you can use tax-free for medical expenses. There is no maximum contribution for FSAs (until 2013), but consider contributing only the amount you intend to use. If you are getting close to the end of the year and a chunk of change is still sitting in your FSA, it results in a forfeited balance to the employer. Any money remaining ends up right into the pockets of your employer.

Sign up for bank alerts. Now that banks can no longer charge overdraft fees on debit-card transactions (unless you opt for overdraft protection), its important to keep close tabs on your balance so your purchase are not declined for insufficient funds. An easy way to do this is to sign up for your bank’s balance alerts.

Make tax-saving home improvements. The tax credit for energy-efficient home improvements expires at the end of 2010. If you have heating units, hot water heaters, windows, or insulation that needs to be replaced, be sure to do it by the end of the year. See the Energy Star website for more information on the types of improvements will qualify for the tax credit.

Boost your 401(k) contributions. If you are in a position to contribute the maximum to your 401(k) this year ($16,500), go for it. If you are 50 or older, use the Catch up Contribution provision to add an extra $5,500.

Clean out your closets and donate what you don’t need. If you itemize on your tax return, take all that stuff to Goodwill or any other charitable organization and claim a deduction for your contribution. Consider using Turbo Tax ItsDeductable Online to keep track of your deductions.

Draft a holiday budget and start setting money aside now. With only 93 days until Christmas its a good time to start saving now if you haven’t started and avoid going into debt this holiday season. Here are 12 Christmas Gift Ideas for Under $10 to help you plan a frugal gift exchange.

{Photo Credit: Work It Mom}

5 Ways to Save on Organic Food

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Yes, you can buy healthy food on a budget! Now that organic foods have become big market, it means that the good stuff is rendering more affordable. As most of you know, I love eating whole, unprocessed foods – nutritious, green foods. But just like you, I don’t like paying high prices for mother nature’s good food. I am hear to tell you about 5 ways to save on organic food.

Coupons!

With the Organic Food sector growing faster than ever, coupons for organic foods are becoming more common. To find the best coupons, check out some of your organic food makers websites for printable coupons. Organic Coupons & Deals has a whole list of companies offering coupons for organic products.

Buy Whole, Unproccessed Foods

Buy products in the bulk aisle like beans and rice. Not only are they more nutritious, they costs are significantly less than their processed counterparts. Just two weeks ago, I learned how easy it was to make refried beans (why did I wait so long?). The cost: $1.68 to feed 8 people. That would have been at least $6 if I bought the canned stuff!

Buy Store Brand Foods

If you feel the need to shop at the more popular big natural and organic stores because they offers items that are not readily found in the average supermarket, at least try shopping at a store like Trader Joe’s. The marketing genius, has about eighty percent of their product sold under their company name. Even better, I discovered that many of Trader Joe’s private labeled products are made by some of the same expensive name brand manufactures (like Tasty Bites Indian Food).

Learn the Dirty Dozen

The dirty dozen are known as the fruits and vegetables most highly contaminated foods with pesticides and chemicals – even after washing and peeling. They are: celery, potato, imported grapes, cherries, apples, spinach, sweet bell peppers, strawberries, raspberries, pears, nectarines, and peaches.

Heidi Kenney’s Dirty Dozen Cheat Sheet

click picture to print yourself a copy

Buy organic versions of the foods on the list when possible. Compare the store’s ads to find current savings.

Don’t Shop Alone

Warehouse membership stores are now carrying a wider selection of organic products. These are items like organic ketchup, fruit snacks & vegetables, peanut butter and dairy. Organic foods are known to have a shorter shelf life than processed food. So, consider taking a friend to help you split costs, packages, and help you use the product within a proper time.

Do you have any tips for saving on organic foods? Also try your local farmer’s market. I was happy to find organic eggs for $3.50/dozen. Yes, I am vegan most of the time (because I can’t stand industrial farming – but that’s another story), unless I can get my hands on products farmed the real way. ;)

(Photo Credit: Wallet Pop)

Health Care Reform: Dependent coverage to Age 26

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Remember President Obama’s push for health care reform? I pretty much forgot about it until I received an ‘Important Special Enrollment Notice’ from my health insurance company. And now that most company’s enrollment periods are coming in November, I think its a good time to bring it up for discussion.

On March 23, 2010, President Obama signed into the law the Affordable Care Act. It’s a law that will hold insurance companies more accountable and lower health care costs, offer more health care choices and increase the quality of health care for all of us. Its explained the act will take place in portions and that some of them have already taken effect. Further changes will not be implemented until 2014 and beyond.

The most current change to take place is Extending Coverage for Young Adults . If you are renewing your health care coverage on or after September 23, 2010 this is how the law affects you and your dependents.

Children can remain on their partents’ health insurance policy until they are 26 years old and related special enrollment right

The health care reform law allows you to keep your children on your health plan until they turn 26 years old regardless of their student status, marital status, whether they live with their parents, or are claimed as a dependent on their parents’ tax return, as long as the dependent is not eligible to enroll in other employer provided coverage. “Children” includes natural childrend, legally adopted children, stepchildren, and children who are dependent on you during the waiting period before adoption. Unfortunately, grandchildren are not eligible. If the state you live in provides a higher maximum dependent age, then that requirement will continue to apply.

  • If you want to add dependents to you health plan who are younger than 26 years of age, you have a one-time special enrollment right under the law. If your adult children under 26 was previously denied in the past or lost coverage because they exceeded the maximum dependent age, then they will fall under this enrollment right. The ‘enrollment period’ takes place no later than the first 30 days of your plan year.
  • If you currently have single or employee/spouse coverage and you want to add children, you need to change your enrollment status to one that allows dependents to be added to your contract, such as family or employee/children coverage.
  • If ou are not currently enrolled, but wish to do so to take advantage of the dependent coverage right, you and your adult chilren may both enroll during the special enrollment period if you meet eligibility requirements
  • If you want your children to stay on the plan, you don’t need to do anything
  • If you don’t want to keep your children on your plan until age 26, you will need to contact your employer’s benefits administrator to remove them as dependents under your policy

No more lifetime dollar limits on benefits and related special enrollment right
The Affordable Care Act requires health insurance companies to remove lifetime dollar limits on benefits from all plans. This applies to medical and pharmacy benefits only; not dental or vision.

  • If your coverage was previously canceled because you reached the lifetime dollar limit under your plan, you have a one-time special enrollment right under the law. You can enroll again and be covered without any lifetime dollar limit on benefits. Again, the special enrollment period will take no later than the first 30 days of your plan year.
  • If you are covered by your employer’s health plan now, you do not need to do anything
  • If you are not covered by your employer’s health plan now and are not eligible to enroll during the special enrollment period, contact your employer’s benefits administrator for more information on when you can enroll

I embrace this current change because as we know, many adult children are moving back home due to the collapse in the financial world. I for one, would feel secure knowing my children are still covered if something ill was to take place; not that I embrace them moving back home. ;)

There are other changes that have taken place that I am for in this health care reform. There is Expanding Coverage for Early Retirees for Americans who retire without employer-sponsered insurance, but are not yet eligible for Medicare. Or there is relief for four million seniors hit by a gap in Medicare prescription drug coverage known as the ‘donut hole’ (each senior will receive a $250 rebate). And pretty soon you can obtain free preventive care services such as mammograms and colonoscopies with being charged. To see more of the changes, go to HealthCare.gov. It’s quite interesting.

Photo credit: {FederalTimes.com}

The Instant Millionaire: A Tale of Wisdom & Wealth

by Mark Fisher
Book Review & Giveaway

Do you ever wonder why you read all your favorite financial blogs day in and day out? I feel there are various reasons. One reason might be to learn how to improve our frugal saavy ways. The second reason might be to learn how to invest your money properly to insure a secure future. The third reason… we’re looking for that magic formula to make us instantly rich. Get rich quick headlines always catch our eye. {Don’t tell me you don’t read that stuff. *pshh* You’re reading this post, right?} ;)

I admit, I don’t have a get rich quick scheme lurking in this post. But what I do have is the financial tool to set you on the millionaire path. If that is what you chose… keep reading.

You see, financial blogs basically denote the same basic tone or structure:

  1. Get rid of the debt
  2. Save, save, save
  3. Invest
  4. Build wealth

Then, its about finding a blog to read that speaks to us, resonates to our financial values or place in our journey. It’s about finding someone or someplace to share our financial progressions, rants, and questions. Thus building a great bond between reader and blogger {I have met some awesome people this way – all of you!}.

So where was I going with this… if every financial blog or website offers the structure for building wealth, why are we not all millionaires? Why do some people succeed in becoming millionaires while others only dream about it? What do they know that others don’t?

I am going to tell you…

because Millionaires understand and practice the principles of success

Want to learn the “instant millionaire” principles? Read on…

The Instant Millionaire: A Tale of Wisdom and Wealth
(New World Library, August 15, 2010)
written by millionaire Mark Fisher

Millionaire Mark Fisher writes this memorable fable based on the true story of his meeting with an old man who passed on his secrets of success.

In practical, ready-to-implement lessons, the “instant millionaire” shares the ideas and actions that can give anyone the mentality of a millionaire {really, its pretty good stuff}. Here is a tidbit of the book’s supportive wisdom:

  • “To get rich, you have to know the secrets of wealth. Most people aren’t ready to accept these secrets even if they are revealed to them in very simple terms. Their greatest limitation is their own lack of imagination.”

    I truly believe the reason most of us don’t acheive true wealth is because people keep a closed mind. The adage, “we are our worst enemy” stands true. Open your mind to seizing opportunites and taking risks.

  • People who waste time waiting for the perfect conditions to fall into place never get anything done. The ideal time for action is now!”

    The fable tells, “If you want to succeed in life, you have to make sure you have no choice in the matter. You have to put your back against the wall. People who vacillate and refuse to take risks because they don’t have all the elements in hand never get anywhere.” (pg 22).

    I agree with that last sentence. I used to be known for never starting something because I wanted to be successful right from the top. In fact blogging has taught me a great deal about putting one foot in front of the other. Just as Dave Ramsey guidance gave me the snowball method to be successful in paying down my debt and building my net worth.

  • “Everything that happens to you is a product of your thoughts. So if you want to change your life, you must start by changing your thoughts.”

    Have faith! As the fable continues, “I must warn you that becoming a millionaire will probably seem to easy. But don’t let simplicity deceive you. Each time you begin to have doubts, remember Mozart: true genius reside in simplicity. With time, as wealth magnetically attracted to you in the most unexpected way, you’ll begin to understand.”(pg 36)

  • “The simple act of putting your goals, deadlines, and sums on paper is the first steps toward transforming your ideal into its material equivalent.”

    Hello?! We all write down our goals. You keep a budget, right? And a net worth sheet? We already have a great roadmap to guide us! So answer this, “how much do you expect to earn next year?” or if you are paying down debt, “how much debt do you plan to pay down by next year?”. Most successful people can tell you on a dime. If you couldn’t answer, up your goal one by listing an amount and making a deadline for reaching it {example, I plan to pay off an extra $5,000 of debt by July 14, 2011. Be precise.}

Of course, I can’t tell you all the awesome principles told in this fable. It’s for you to seek the remaining ready-to-implement lessons and put them into practice {magic word, ‘practice’}. The fable has similarities to The Richest Man in Babylon. Which means, the book’s 121 pages gives you the core structure for acheiving wealth. That the secret to becoming a millionaire doesn’t take a library of books to learn. Just one book and a couple of hours. It’s known as the “instant millionaire” because the young man grasped the true secret of making a fortune overnight. And so can you. What are you waiting for?

Kim from New World Library is making a copy available for a giveaway! To enter do one of the following:

  • ReTweet the book review
  • Follow me on Twitter
  • Sign up for my RSS Feed
  • Comment if were you able to answer the question above with your specific financial goal for next year with an exact date?

Each task is an entry. Complete them all for an increased chance of winning! Since I don’t get back from camping until Monday night… will leave the giveaway open until Tuesday, September 14th. Look forward to hearing if you were able to answer your financial goals on a dime! Oh ya, and leave a comment telling me what you did to enter the giveaway!

The Instant Millionaire: A Tale of Wisdom and Wealth


*Financial Samurai is hosting a Book Review & Giveaway: The Simple Dollar by Trent Hamm. It has a fantastic interview between Sam and Trent. Be sure to check it out!

This giveaway has ended

Going Paperless with your Financial Documents

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I’ve noticed more company are offering incentives for customers to go paperless – receiving statements, notices, and other paperwork electronically, as well as making payments over the internet. In addition to saving trees, going paperless can also save you money. Consider these reasons for trading the snail mail documents for electronic ones.

Going paperless with your financial documents offers several advantages for customers.

Cost Savings
Paying bills online eliminates the cost of postage. You can utilize your bank’s bill pay feature to send payment via electronically. Many companies are set receive a direct payment from your bank within two days, maximizing the time your money is earning interest. Also some banks are offering incentives for you to go paperless. Wells Fargo is holding an Online Statements Sweepstakes where you could win $25,000 or one of ten $2,500 prizes for switching to online statements.

Reduce clutter
All those paper bills, notices, and statements tend to pile up, and they need to be stored somewhere. When you finally sort thru those documents, they will needed to be shredded before discarding them. Electronic version don’t take up any space – except on your computer hard drive.

Convenience
You might be able to search and sort electronic bills and statements or import the data info financial programs, such as Quicken®, for analysis. Bank statements often contain interactive features that let you find out more about a charge and reconcile your checkbook or spreadsheet records. And electronic documents are portable (it is very convenient for me to keep my records on a flash drive). Having your documents categorized and sorted makes things easier come tax time. And filing your tax return electronically can speed up your refund.

Environmental benefits
PayItGreen, a coalition led by an electronic-payment industry group estimates that by eliminating paper statements, bills, and payments alone, the average household would save 6.6 pounds of paper each year, avoid the release of 171 pounds of green house gasses and 63 gallons of wastewater, and cut gas consumption by 4.5 gallons. Who knew?! The estimates take into account paper, transportation, and disposal.

Still not sure if you want to take the paperless route with your financial documents? Consider these tips for giving up paper.

Secure your computer
Back up your hard drive and keep a copy of your data in a different location from your computer in case of a fire or other calamity. Consider an online storage service like Wells Fargo’s vSafe. Make sure you have updated antivirus and antispyware programs (I highly recommend PCTools).

Download copies
Consider downloading copies onto your computer for safekeeping and future reference.

Record scheduled payments
If you set up online bill pay, especially if its automatic, be sure to record the payment in calendar, financial software or checkbook well in advance so you don’t risk overdrawing your account.

Retain confirmations
Whether you are paying a bill, making a deposit, transferring cash or anything else, save a copy of all confirmations. On your computer’s hard drive, consider setting up a folder called “Bill Confirmations”. Extract attached documents from your e-mail and save them in the appropriate folder.

Keep information current
Notify businesses if your change your email address. Otherwise you might miss bills or other important documents, exposing yourself to late charges and other problems.

I am 98% paperless with a few straggling prospectus coming via snail mail. Where as my husband is still pro paper. Vies that having a hard copy in hand lends for making sure bills are paid on time. Have you gone paperless with your financial documents? Why or why not?

Further Reading: Automating your Finances by Ramit Sethi

{photo credit: midcontinent}

Alternative Health Care Approach

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In my last post, 6 Steps to a Satisfied Retirement, I questioned myself about the ability to be able to “retire”. As Merriam-Webster defines, “To withdraw from one’s occupation, business, or office; stop working.” Granted, I am not talking about completely retiring from my occupation. But rather to seek out the self-employment option.

My main reason for wondering if I could retire: health care insurance. I treat it like gold. I pay about $150 month for medical insurance for the kids and me (or $1,800/year; excluding co-pays). If they get sick, I simply take them to the doctor’s office for some medication and wha-la! they are better.

But I sometimes wonder about the option of seeking out alternative health care approaches over paying expensive insurance premiums. I mean popping a pill every time something aches cannot always be the answer, right? Especially with all the righteous side effects you hear about on TV.

Here are some alternative health care methods to consider (for a full list, click here):

Acupuncture – involves the insertion of extremely thin needles in your skin at strategic points on your body. Traditional Chinese theory explains acupuncture as a technique for balancing the flow of energy or life force — known as qi or chi (chee) — believed to flow through pathways (meridians) in your body. By inserting needles into specific points along these meridians, acupuncture practitioners believe that your energy flow will re-balance. (my aunt swears by this to get rid of those headaches!)

Yoga – Yoga is a practical aid. It is a system of exercises based on a harmonizing system of development for the body, mind, and spirit. The continued practice of yoga will lead you to a sense of peace and well-being, and also a feeling of being at one with their environment. Definitely gets rid of a back ache.

Chiropractic – A system of diagnosis and treatment based on the concept that the nervous system coordinates all of the body’s functions, and that disease results from a lack of normal nerve function. Chiropractic employs manipulation and adjustment of body structures, such as the spinal column, so that pressure on nerves coming from the spinal cord due to displacement of a vertebral body may be relieved. Also consider massage therapy.

Hypnosis – is a mental state (state theory) or imaginative role-enactment (non-state theory) usually induced by a procedure known as a hypnotic induction, which is commonly composed of a long series of preliminary instructions and suggestions. Used commonly for assisting one to get over phobias or to quit smoking.

Natural Medicine – (aka – Naturopathy) is an alternative medical system that focuses on natural remedies and the body’s vital ability to heal and maintain itself. Naturopathic philosophy favors a holistic approach and comprises many different treatment modalities of varying degrees of acceptance by the medical community; diet and lifestyle advice may be substantially similar to that offered by non-naturopaths, and acupuncture may help reduce pain in some cases. (Or there is Natural Remedies like peeing in the ear to heal an ear ache – ewww!!!)

Tai Chi – The ancient art uses gentle flowing movements to reduce the stress of today’s busy lifestyles and improve health.

Aromatherapy – A form of alternative and complimentary medicine based on the use of very concentrated “essential” oils from the flowers, leaves, bark, branches, rind or roots of plants with purported healing properties. There are many benefits to using aromatherapy.

Doula – Hiring a doula to aid in the birthing process. A doula is an assistant who provides various forms of non-medical and non-midwifery support (physical and emotional) in the childbirth process.

Chinese food therapy is a practice of healing using natural foods instead of medications. We all know the chicken soup remedy for the common cold. And lemon & honey in our tea for a sore throat. Cinnamon, peppermint, or ginger ale for an upset stomach.

What I am getting at is… we all hear that daily exercise, eating organic foods, and having a good social life are keys points to living a healthy lifestyle. Yet most of us don’t invest in the holistic approach, although such practice(s) been around for thousands of years.

Could you feel comfortable in investing (both financially & physically) in nature’s intent (that has been around for thousands of years) rather than paying out for expensive health care premiums?

And should you get sick, could you take yourself to an alternative medicine doctor (like a naturopath or a chiropractor) when you are feeling out of sorts?

Note: I am still on the brink of debate about this one. I truly believe in alternative health care approaches and am aware that they can be budget friendly. However, if something like my kids break a bone or something then my only option is to pay out of pocket expenses for the hospital. Now, if I thought how many times I’ve utilized the hospital for an emergency situation.. it’s enough to count on one hand. I assume maybe I could go with this option if I make sure to have a medical emergency fund in place.

(picture credit: Integrated Supplements)

6 Steps to a Satisfied Retirement

18 Replies

Discipline bears fruit over time when discussing the retirement savings. But if you’re like many people who are still working but are closing in on retirement, there is still hope for a happy retirement. A recent Consumer Reports Retirement Survey, of more than 24,000 online subscribers, found 6 steps that work to obtaining a satisfied retirement.

  1. Live Modestly

    This was the top “best step” listed by retirees who said they were highly satisfied with their lives; 39 percent said they did not spend beyond their means. One way to rein in spending is to create a budget using store-bought software such as Quicken or a free online service such as BudgetPulse (https://www.budgetpulse.com/). Those programs help you track your spending and your progress toward meeting saving goals by consolidating your financial data from banks, credit-card companies, and brokerages.

  2. Maximize your savings

    Even if you don’t have a defined-benefit plan, regularly contributing to a 401(k), 403(b), IRA, or other investment vehicle pays off, our satisfied retirees told us. (Saving too little was a regret of 27 percent of dissatisfied retirees.) At 50 and older, you can put as much as $22,000 into a tax-deferred, traditional 401(k) plan or after-tax Roth 401(k) or their 403(b) equivalents in 2010.

  3. Reduce debt

    Thirty-eight percent of retirees owed $25,000 or more on their mortgages. But 74 percent of retired respondents who were free of major debt reported being highly satisfied with their retirement. For greater peace of mind, pay off your debts before retiring. Even a low-rate mortgage can be a burden if other expenses rise and your income-producing assets falter. Notably, debt-free retirees had a higher median net worth than those with debt: $843,000 compared with $717,000.

    In the current economic environment, accelerating payment of your mortgage can be a wise investment. Most certificates of deposit, bank accounts, and other safe savings vehicles are paying less than 2 percent, so putting your money into additional payments on a 5 percent mortgage instead offers a better return (though you’ll give up some tax deductions on mortgage interest). By making extra principal payments, you can whittle down your loan’s interest cost and term handsomely. For example, adding $100 per month to payments on a 30-year, $150,000 mortgage with a fixed rate of 5 percent reduces the total interest by almost $35,000 and cuts the loan’s term by 6½ years.

    I agree on this one! My husband and I participate in an accelerated mortgage program. Not only is it nice to make our mortgage payments weekly and the life of the loan is reduced significantly, but we’ll also save over $40,000 in interest!

  4. Don’t invest too conservatively

    Taking on even a moderate amount of risk pays off. Median net worth for retirees who said they took a middle-of-the-road approach was $836,000 vs. $671,000 for conservative investors. Notably, the difference in net worth between self-described moderate and aggressive investors was relatively small: a $57,000 advantage for the more aggressive. The lesson: You don’t have to go out on a limb to get the best return. Diversification will help reduce your risk.

    I will have to let my husband know the results of this one. Being so close to retirement, he believes in investing agressively to play catch up on the missed years. With a relatively small advantage I don’t think it is worth it. I fear there would be potentially much more to lose if their was another crash. What’s your thought on this one?

  5. Study your options

    When you design your dream retirement, also devise a Plan B in case you’re forced to retire early or can’t sell your home (a predicament of 8 percent of surveyed retirees). Your alternative plan might include a more restrictive budget or a different retirement location. To determine your Social Security benefits at different ages, go to www.ssa.gov.

    A major issue will be health-care coverage. You can move to your spouse’s insurance plan, find a new job with health benefits, extend your own employee coverage under the COBRA law (go to www.dol.gov and type “cobra” in the search box for details), or look for private health insurance. If you go that last route, try to get group coverage through professional or other membership associations.

    What about becoming an expat for Plan B? I heard their are some nice places to live on way less money. Anyone have experience with obtaining healthcare as an expat?

  6. Take the intangibles seriously

    Stress affected overall satisfaction in retirement even more directly than net worth, our survey found. A quarter of retirees cited nonmonetary stresses such as family relations, poor health, a loss of identity, and boredom. So before you retire, develop hobbies and line up volunteer work, trips, or part-time jobs. Strengthen your personal connections outside the workplace. And, of course, do what you can to maintain good health.

    I agree on finding a hobby before retirement. I have seen too many people get bored. But I have also seen people enjoying their retirement thru volunteering.

Retirement planning is not solely based on a person’s financial net worth. The survey found a happy retirement was about the same between those with a net worth of $500,000 and $1 million. Having more than $1 million did not make a notable difference in their level of happiness either. And if your net worth at retirement will be lower than $500,000… or even lower than $250,000, more than 50% of retired individuals were still statisfied with their retirement.

Are you ready for retirement? Just in case, do you have a plan B?

(photo credit: Mississippi Family Law)