It takes significant planning and effort to get on track for retirement, but it takes just as much discipline to live on a fixed income in retirement. Kevin O’Leary, the well-known entrepreneur from the hit TV show Shark Tank, explains that following one rule can help retirees live successfully on a fixed income.
This rule, he says, is entering retirement free of high-interest debt. For many people, this is a challenging undertaking, but O’Leary explains that it’s worth it to have more cash flow during your golden years.
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Why O’Leary insists retirees should be debt-free
Before retirement, people live on a salaried income. This income continually regenerates as you contribute to your retirement accounts. However, in retirement, people transition to living on a fixed income. That means their nest egg slowly loses value with each withdrawal. For many people, this change can be challenging.
One way to help ameliorate the stress of living on a fixed income is to ensure you have positive cash flow. The best way to achieve this, according to O’Leary, is to ensure you don’t carry high-interest debt in retirement.
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Overspending is just as damaging as carrying debt into retirement
Another tip O’Leary suggests is to track your spending. He says that it’s very common for people to spend more than they should. He’s been quoted advising people that they shouldn’t go out to eat for lunch, for example, when they have a small income.
Tracking your spending when you’re on a fixed budget in retirement can help you see where you tend to overspend. This, in turn, can help free up cash flow to pay down any high-interest debt you still have in retirement.
Relying too much on Social Security puts you at a disadvantage
O’Leary warns that relying too much on Social Security puts retirees at a disadvantage. In fact, he stresses that Social Security was never meant to be the sole source of income for retirees, though many people use it that way.
The average Social Security check is just over $2,000, according to the Social Security Administration. For many people, that is not enough to sustain a quality lifestyle. If retirees rely solely on Social Security, there may be other ways to increase income, including going back to work part-time, which is possible if they are physically able to do so.
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A cash cushion can help eliminate the debt cycle
In addition to tracking expenses and living on less than you earn, O’Leary is also a huge proponent of keeping a cash cushion.
A recent Debt.com survey found that 55% of adults in the United States use credit cards to pay for basic expenses they can’t afford. That means many people do not have enough of a cash cushion to cover their basic necessities, let alone a financial emergency.
Having a large cash cushion equal to three months of expenses in retirement can help prevent having to sell investments during a turbulent market. It also helps people escape the debt cycle so they don’t reach for a credit card during a financial emergency.
Increasing cash flow is vital to afford health care expenses in retirement
Although it can be challenging to pay down debt and manage a budget on a fixed income in retirement, increasing your cash flow is important for affording health care expenses.
According to Fidelity data, retirees over age 65 will spend more than $185,500 on health care expenses. This number does not include nursing home expenses or specialty care like memory care facilities. As such, many retirees are not prepared for the large number of health care expenses that they may have during their golden years.
O’Leary’s advice may not work for everyone
Even though O’Leary is adamant about the dangers of high-interest debt, especially for retirees, clearing that debt may not be realistic for everyone. This is O’Leary’s philosophy, but it’s not personalized advice that would work for everyone.
The ability to pay down high-interest debt depends strongly on individual circumstances, interest rates, habits, obligations, and income.
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A financial planner can help with a personalized plan
If you’re not sure how to organize your finances or if paying off high-interest debt is even a reality for you in retirement, one option is to meet with a financial advisor.
A financial planner can look at your complete money picture and tailor a plan specifically for you. They can also help make a withdrawal strategy that is tax-advantaged if you also have a 401(k) in addition to your Social Security income.
Bottom line
One of the more challenging financial mistakes people make is getting caught in the high-interest debt trap. Not only is this stressful, but it can negatively impact your cash flow when you’re on a fixed retirement income.
O’Leary suggests paying down high-interest debt as fast as possible. If you’re not sure how to do that, work with a financial advisor who can create a plan for you.
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