Yo, money fam! We’ve all heard the mantra: “Be debt-free by 45” But hold up, is this golden rule etched in stone, or is it just another financial fad? Let’s dive into the depths of debt and discover why 45 might not be the ideal age to ditch it all.
Shark Tank’s Kevin O’Leary throws down the gauntlet:
He claims being debt-free by 45, especially mortgages is the key to early retirement success. Why? Because once you’re free from financial obligations, you can focus on building wealth and securing a comfortable retirement by 60.
But wait, there’s a twist:
Financial planner Rachel Sanborn Lawrence throws a curveball She argues that aiming for debt-free status by 45 might not be the wisest move for everyone In fact, it could mean leaving money on the table.
Here’s the catch:
Putting your extra cash into the stock market could be a wiser move if your debt interest rates are lower than 10% to 15%. The stock market has historically performed better than these rates, which could result in higher financial gains.
Mortgages: A special case:
With interest rates at historic lows, rushing to pay off your mortgage might not be the best strategy. Instead, let your money grow in the market and reap the potential benefits.
The gender wage gap throws a wrench in the plan:
Women, especially women of color, face a unique challenge. Their pay peaks typically happen around age 40, whereas men’s peak occurs at age 55. This means they have less time to accumulate wealth before retirement.
So, what’s the real deal?
While being debt-free by retirement age (65 or earlier) is a worthy goal, don’t get hung up on the number 45. Focus on building a solid financial plan that aligns with your individual circumstances and goals.
Here are some key takeaways:
- Debt isn’t always the enemy: Use it strategically for things like mortgages, education, or reliable transportation.
- Invest wisely: Let your money work for you in the market, especially when interest rates are low.
- Be mindful of the gender wage gap: Women may need to adjust their financial strategies to account for earlier salary peaks.
- Seek professional guidance: A financial planner can help you create a personalized plan that meets your specific needs and goals.
Remember, the path to financial freedom is unique for everyone. Don’t blindly follow the 45 rule. Instead, focus on building a solid financial foundation that allows you to achieve your dreams, regardless of your age.
Why not everyone should pay off all debt in their 40s
If being debt-free in your mid-40s sounds like a dream, thats understandable. Debt can often feel weighty, especially when its in the five- and six-figures. The idea of having student loan debt for decades can be unsettling for many consumers who graduate from college in their early 20s. In addition, you might worry that your debt will prevent you from reaching other financial goals, like homeownership, even though this is frequently untrue.
But mathematically, theres not always an incentive to be debt-free so soon, argues Sanborn Lawrence. If the interest rates on your debt are below 5% to 10%, it often makes most sense to invest your extra cash in the stock market, which has historically earned at above this rate, rather than rushing to pay off debt.
Mortgages, for instance, are at historic lows right now, so someone with an interest rate at 3% or below shouldnt feel pressed to pay off their home quickly and instead let their money grow in the market.
“You will be net positive if you are borrowing money at a lower rate than you can earn on that money,” says Sanborn Lawrence.
When you’re ready to invest your money, this three-question checklist will help you decide if you want to invest in the stock market.
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According to investor Kevin O’Leary of “Shark Tank,” if you want to retire by the age of 60, 45 is the ideal age to be debt-free.
According to O’Leary, paying off your debt, including your mortgage, by the time you are in your mid-40s puts you on the early path to success. It assists you in releasing yourself from debt at a time when your income is probably steady and may even be increasing. You can ramp up your savings so you can ensure a comfortable life in retirement.
In an interview with CNBC Make It in 2018, Oleary stated, “Most careers start in the early 20s and end in the mid-60s.” “Therefore, the game is more than half over when you’re 45 years old, and you better be debt free because you’re going to use the remaining innings to accumulate capital.” “.
While OLearys advice may resonate with some, Rachel Sanborn Lawrence, advisory services director and certified financial planner at Ellevest, says that aiming to be debt-free by 45 may be ill-advised. Not only is it unrealistic for many — it might also mean you leave money on the table.
Sanborn Lawrence discussed with CNBC Select who should be most cautious when following O’Leary’s advice and why.
How Much Income You Need To Save (By EVERY Age)
FAQ
How much debt should you have going into retirement?
What is a good debt to income ratio for retirement?
Is it good to be debt free in retirement?
Can I retire with 500k and no debt?
How much debt do you have in your retirement savings?
The proverbial red line here for retirement savings-endangering debt is $50,000 or more of either mortgage or non-mortgage debt. Fortunately, there are approaches that can help you manage or eliminate your debt. In the course of a working lifetime, it’s amazing how much debt you can rack up.
What percentage of retirees are debt free?
Three in 10 devote more than 40% of their monthly income to debt and a quarter have a mortgage with more than 20 years remaining on it. More than half say they intend to enter retirement debt free, but only one-quarter of retired Boomers actually are debt free. The Federal Reserve data suggests that these are the average debt levels by age:
Should you pay off debt before retirement?
So let’s change that old axiom about paying off debt before retirement: Keep working, at least a little, when you have high-interest debt to pay. An added benefit of stretching out your working life is you may be able to obtain health insurance to bridge the gap to Medicare age.
Are older people in debt in retirement?
A growing number of older adults are in debt in retirement, according to the 2022 Survey of Consumer Finances from the Federal Reserve. Among people ages 65 to 74, the share with debt rose to 65% in 2022, up from 50% in 1989 (the first time this question was asked). For people 75 and over, 53% report holding debt in 2022 versus 21% in 1989.