With a more uncertain future for those headed towards retirement it makes logical sense that we need to make preparing for our own retirement a priority in our lives. All indications are there will be less financial help available for us when we do eventually retire and that will most likely be later than most expect.
So considering the importance of preparing for retirement, let’s look at the cost of making some common choices when dealing with debt and how much those choices can cost us in lost retirement.
This article is not designed to talk people out of credit counseling, but to help them make fully informed decision about what may be right for them knowing all the facts.
The Hidden Cost of Credit Counseling
Let’s look at the hidden cost of credit counseling. A consumer credit counseling plan is generally a five year repayment plan with payments made monthly. Many debt settlement monthly payment plans are similar in length.
In this example I’m going to use the figures based on a credit counseling program but the theory applies to any repayment program that takes a period of time and delays the ability to start saving fast.
I’m not aware of any debt settlement or credit counseling program that presents this information to consumers before enrolling them in their monthly payment programs.
Let’s Let the Numbers Speak
For this example I’m going to assume our 35 year old family has $30,000 in unsecured debt they are enrolling into a credit counseling program.
The monthly payment for that program would probably be about $625 per month with another $50 added on as a fee for the credit counseling agency.
Over the five year period of the program the monthly fee, if it was saved and put in a low or no interest rate emergency fund, would be $3,000.
If the family did not enroll in an extended repayment plan and instead filed bankruptcy to discharge their debts quickly, the $625 monthly payment could instead be invested towards retirement.
One such common place to invest is in mutual funds. As I write this some stock market index funds have returned over 15 percent over a ten year period of time. – Source
So if our family made payments of $625 a month for five years into their own retirement account instead of the credit counseling or debt settlement programs the fund would be worth $51,043.
It is safe to assume that retirement is going to be delayed until at least 70 for the future for such families.
If the example family was 35 when they started the five year program they would be 40 when they finished. If they did not make any more payments into their retirement fund and just let the $51,043 ride till they were 70, the fund would be worth $1,834,977. Money they could use for their retirement.
By enrolling in the credit counseling or debt settlement program our family is giving away nearly $2 million in retirement savings.
If they continued their $625 a month till age 70 the retirement account would be worth and estimated $4,019,330.
If the same family was 50 when they finished the credit counseling or debt settlement program their retirement fund would be worth $555,988. That still nothing to sneeze at.
What Does the Math Tell You?
Recently I wrote that people need to think like corporations when making financial decisions about what is right for them.
They need to carefully consider all the facts and make the decision about how to deal with their debt that is best for them.
So what do you think. Is enrolling into a monthly payment plan worth sacrificing millions in retirement?
Or when evaluated like that does a chapter 7 bankruptcy and getting back to saving quickly make more financial sense?
You can click here to find a local bankruptcy attorney and talk to them for free about your specific situation. Get the facts and then you can make an informed and educated decision if bankruptcy is right for you.
By the way, more than 70 percent of people that file for bankruptcy qualify to file a chapter 7 bankruptcy and discharge their debt in about 90 days.
Do you think that considering the impact on retirement savings changes the way people look at credit counseling or does it even matter?
Debt Repayment Calculator
This calculator demonstrates the future retirement financial loss you may experience when electing to repay your debt with an extended repayment program offered by creditors, credit counseling or debt settlement, rather than intervene on your debt with solutions like bankruptcy which terminate the debt quickly and allow you to resume saving again for retirement.
The calculator solves two problems.
Cost of Payment Plan in Retirement Dollars: This is the value of the retirement funds that you could have invested rather than repay your debt through an extended repayment program.
Future Lost Retirement Value: This is the amount you will lose in retirement from entering into a repayment plan to deal with your debt.
If you want to just see the amount lost from the payment plan, leave the “Monthly Payment After Payment Plan” box at 0.
Here is an example:
Current Age: 25
Monthly Payment: 300
Monthly Payment After Payment Plan: 0
Length of Payment Plan: 5
Rate of Return: 10
Estimated Retirement Age: 70
Cost of Payment Plan in Retirement Dollars = $23,231.12
Retirement Cost of Payment Plan = $1,247,526.55
What This All Means
If you elected to pursue some other solution, like bankruptcy, to discharge your debt quickly, you would not make monthly payments into an extended repayment plan. Those funds could instead be used to save towards retirement.
In this example, if our 25 year old debtor decided to enter into a credit counseling or debt settlement program they would repay their debt but that plan would cost them $23,231.12 in retirement funds that would be worth $1,247,526.55 when they eventually retired.
The purpose of this calculator is to not talk you out of credit counseling or debt settlement but to assist you to make a more informed decision about the future costs to you.
Current Age: Enter your current age.
Monthly Payment: Enter monthly payment of debt plan.
Monthly Payment After Payment Plan: Enter any payment you expect to make on a monthly basis into your retirement plan after you get out of debt. Leave this as 0 if you just want to see the future cost of lost retirement from a repayment plan.
Length of Payment Plan: Enter the number of years the repayment plan will take.
Rate of Return: Enter the rate of return you anticipate your retirement plan to have. Keep in mind that a good stock index mutual fund can return 10% or more.
Estimated Retirement Age Age: The age you anticipate retiring at.
And if you don’t think worrying about saving for retirement is important, please read The Saddest Avoidable Mistake People Make When Getting Out of Debt.
Why This is Important
Government data shows 41 percent of Americans aged 55-64 have no retirement savings account.
For those in this age group who do have a retirement account, the median account balance is only $103,200. In addition, an increasing number of Americans are retiring without pensions.
The Employee Benefit Research Institute (EBRI) finds that 44 percent of baby boomers will fall short of adequate retirement income for basic expenses and uninsured health care costs.
Women, in particular, have an increased likelihood of outliving assets due to, among other things, lower savings and lower private pension coverage. – Source
You don’t want to wind up broke in retirement.