This 60-year-old from Pennsylvania has $0 in savings and $26K in consumer debt — but he wants to retire at 65
Like many older Americans, Tom from Lancaster, Pennsylvania is approaching retirement with nothing saved.
After witnessing his father die six months before retirement and suffering a heart attack himself, he went on a spending spree: “I was like, ‘I’m going to live like it’s my last,’ because you just don’t know,” he told hosts of The Ramsey Show during a recent episode.
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“I think that’s where I fell into a trap.”
Nevertheless, as Tom, 60, told the co-hosts, he’s determined to dig his way out of this trap rapidly and his game plan was a surprise to even them.
It would be a quick turnaround
Approaching retirement with debt instead of savings isn’t unusual. U.S. Census data suggests that only 58.1% of baby boomers, older than 56, had at least one retirement account as of 2020. As for what’s in those accounts, by 2022, someone aged between 55 and 64 had a median debt balance of $90,000, according to data from the Federal Reserve’s Survey of Consumer Finances.
Even Tom’s spending spree after an existential crisis isn’t unusual, with 27% of American adults now “doom spending,” according to a survey by Intuit’s Credit Karma. Dreadful news about home affordability, inflation, geopolitics and climate change is impacting the way Americans save and spend.
However, Tom isn’t waving the white flag yet. Instead, he’s determined to get back on track. He and his wife make a combined income of $72,000 a year, after taxes. He plans to set some of this aside to pay off all credit cards and personal loans, which total $26,000, by October this year.
After paying off debt, Tom believes the family will have excess cash available to start saving. He's even taken on extra work, having started up a candle-making business to earn a little extra. However, he understands the need for an aggressive savings and investment plan to meet his ambitious target of retiring by 65.
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Get aggressive with savings
Tom’s family doesn’t have a mortgage, so they will be debt-free after the consumer credit is paid off later this year. To maximize his chances of retiring in a few years, Tom intends to max out his retirement accounts — the 401(k) and Roth IRA.
Ramsey Show co-host George Kamel recommends using the catch-up contribution room available to someone of this age. The IRS allows workers over the age of 50 can make additional contributions to their tax-advantaged retirement accounts every year to catch up on their retirement goals. For 2024, Tom can potentially contribute $7,500 additional to his 401(k) and $1,000 more to his IRA beyond the standard contribution limit.
Tom also intends to sell the family home and downsize to boost his chances. Downsizing has become more difficult in recent years, with only 5% of people over the age of 65 reporting moving between 2016 and 2021, according to a report in Bloomberg. But Tom’s lack of housing debt makes it potentially more viable for his family.
Selling the home should also reduce his property tax burden of $4,500.
The family can rely on roughly $4,000 a month in Social Security payments, but Tom has also factored in the possibility of these payments declining in the future. Retirees can expect a cut in benefit payments if Congress doesn’t fix funding issues by 2034, according to the 2022 Social Security Trustees report.
Finally, Kamel recommends using a Health Savings Account (HSA) to save up for medical expenses. “Take advantage of all of that, max everything out once you get rid of consumer debt and once you have a three- to six-month emergency fund,” he says.
Despite these efforts, Tom’s goal of retiring by 65 might still be beyond reach. He may have to dial back his income assumptions, cut costs further or delay retirement by a few more years. His struggle highlights the challenges of retiring without a comfortable cushion of cash.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
