The Senior Scene

Personal insurance policy renewal letters, the first sent since the state insurance commissioner enacted a rule June 20 to ban insurance companies from using credit information to set rates, have begun arriving in mailboxes and e-mail inboxes around  Washington with what AAA calls shocking news.

AAA, which provides travel and insurance-related services, wants consumers to understand how the rule change will impact their auto, home, renters, motorcycle, boat, and RV insurance rates. People with low credit scores will celebrate the good news of a rate drop, and consumers with high credit scores should prepare for rates to increase, sometimes more than 20 percent.

“This will be a shock to people with good credit. Consumers with a high credit score were essentially receiving a discounted rate on their insurance, whether or not they knew it,” said Patrick McCormick, AAA Washington’s vice president of insurance. “Removing the credit element from determining rates also removes that discount, resulting in a more expensive insurance rate without the consumer doing anything to negatively impact their rate.”

The change will likely put a significant burden on one particular segment of the population — senior citizens with high credit scores and who live on a fixed income, according to AAA.

“Not only do many seniors live on very strict budgets, they generally have higher credit scores. Preventing insurance companies from taking credit into account may create difficult financial times for these Washington residents,” McCormick said.

The federal CARES Act placed a temporary hold on the use of credit scoring in recognition of the pandemic’s impact on peoples’ credit. As a result, credit bureaus are collecting a credit history that is inaccurate for some consumers and producing unreliable credit histories. Insurers rely on credit histories to set rates for policyholders, which currently is an unreliable system, according to the insurance commissioner.

If a consumer’s insurer is increasing their premium, they should shop for a better deal, said officials in the insurance commissioner’s office.

“You have the best opportunity in two decades to get better deals on auto and homeowner policies since insurers can no longer use credit scoring. Your premium will depend on more predictable factors like how you drive, what material your house is made of and if you file a claim,” the office said in a prepared statement.

For consumers with a high credit score who receive notice of a rate increase at renewal time, AAA recommends:

• Sign up for your insurance company’s Usage Based Insurance, which gathers information on driving behavior  – such as hard braking or accelerating, what time of day you drive the most, and how much you’re driving.
• Bundle home/renters, auto, recreational vehicles and other policies under one company to get a better rate.
• Washington drivers over 55 years old can receive an auto insurance discount by taking driver-improvement courses every two years.

After decades in the workforce, retirement is finally in sight. But as you look forward to a leisurely future, does debt threaten to darken your sunny horizon?

In 2020, the average baby boomer had $97,290 in debt, according to Experian data. Starting retirement with debt can be worrisome. You can get out of debt by following these steps and holding yourself accountable.

Know your total debt.

Review all your accounts and add up any balances to calculate your total debt. This might include:mortgage, auto or personal loans, mome equity loans or lines of credit, and credit cards.

Paying down your highest-interest debt first will reduce the amount you spend on interest. For example, if you have a credit card balance with an 18.99 percent annual percentage rate (APR) and a car loan with a 3 percent APR, paying off the credit card should be your priority. This way you can save more money to put toward your other debts.

Create a budget.

Your income and expenses may change significantly in retirement. Creating a budget for retirement can help you better manage your money once you’re no longer bringing home a paycheck.

Add up all your sources of income for the month. Then subtract your fixed monthly expenses—things such as a mortgage, insurance premiums, or a car payment. Finally, estimate your discretionary spending—expenses that vary each month, such as groceries or dining out.

Next, look for places to cut spending so you can pay down debt faster. Could you eat out less often? Stop buying new clothes? Shop around for insurance to lower your premiums?

Taking steps to reduce spending gives you more money to put toward paying down your debt. Also look for ways to bring in more money, such as:freelance or consulting work (offer to consult for former employers or similar businesses, or seek freelance work on sites such as Fiverr, Upwork and Freelancer.com.),.teaching (music or art lessons, for example, or tutor local students), driving for a rideshare service like Uber or Lyft, and selling your castoff furniture, clothing, books and other items on eBay or Craigslist?

Review pay-off options.

Two strategic approaches to paying off debt are the avalanche method and the snowball method.

With the debt avalanche plan, you make minimum monthly payments on all debts except the one with the highest interest rate. Each month, pay as much as you can toward that debt until it’s paid off. Then focus on the debt with the second-highest interest rate, and so on.

The debt snowball plan prioritizes the debt with the smallest balance. Make the minimum monthly payments on all other debts, and put as much as possible toward your smallest debt until it’s gone. Then move to the debt with the second-smallest balance, and so on.

The avalanche plan typically saves you more money on interest, but the snowball plan gets faster results, which can motivate you to keep paying down your debt.

Some other options:

• If you have several different debts to pay off, you might save on interest by consolidating them into one personal loan. Personal loans generally charge lower interest rates than credit cards, making them a good way to pay off high-interest credit card debt. Unlike secured loans such as mortgages and car loans, personal loans generally require no collateral, so your assets aren’t at risk. Because these loans are unsecured, however, it’s easier to qualify (and get better rates and terms) if you have good credit. You can get personal loans from banks, credit unions and online lenders. Before applying, check your credit report and credit score. This will help you identify personal loans for which you’re likely to be approved.
• A balance transfer credit card with an introductory 0 percent APR is another way to pay off high-interest debt. Balance transfer cards are most often used to transfer high balances from one or more credit cards to the new card. When you are approved for the card, the card issuer will pay off the debt you wish to transfer and move it to the new card. Some may send you a check to put toward other debt, such as a loan. A balance transfer card works best if you have good to excellent credit and a relatively small amount of debt that you can pay off before the intro 0% APR period expires. The transfer amount can’t exceed your card’s credit limit, and you can’t transfer a balance from one card to another from the same issuer.

Get help through credit counseling.

What if you’ve considered all your options and still aren’t sure how to get out of debt? Non-profit credit counseling agencies offer free or low-cost services from certified counselors who can help you create a budget and develop a plan to pay down debt. They can even negotiate with creditors on your behalf to reduce interest rates or waive fees as part of a debt management plan.

To find a reputable credit counselor, look for one that belongs to a certification organization such as the National Foundation for Credit Counseling or Financial Counseling Association of America, or check out the U.S. Department of Justice’s list of approved credit counselors by state.

As you pay down debt, consider free credit monitoring from Experian, a consumer and business credit reporting and marketing service.

Source: Experian

Delaying retirement has become common for many Americans, either because they saved too little or they just want to continue working because they enjoy it. Others go in the opposite direction. They retire early – sometimes out of choice, but often because their health or the economy forces it.

While early retirement might sound appealing, it can be a struggle for those who don’t have sufficient income to pay their bills. That’s why if you are weighing the pros and cons of early retirement, you need to get a good handle on your potential sources of income. You may find you lack what you need – an especially unnerving conclusion if early retirement isn’t really a choice.

But don’t despair. It’s also possible you have more income options than you realize. Those can be broken down into the categories of bridge income, fixed income, guaranteed income, and speculative income. Let’s look at whether they fit into your situation – and possibly your early retirement plans.

Bridge income.

To support yourself in early retirement, you may need to tap into your assets sooner than planned – essentially bridging the gap until your other expected retirement income sources kick in. Fortunately, there are ways to do that without incurring penalties for early withdrawal. For example, if you retire before you’re eligible for Social Security and Medicare, you can withdraw money from your traditional IRA before age 59½ without paying the 10 percent penalty. That’s because of something called the 72(t) provision. Similarly, the Rule of 55 allows you to withdraw money from your 401(k) or 403(b) without penalty if you are between 55 and 59½  and have been fired, laid off, or quit your job. (This applies only to the retirement plan sponsored by your most recent employer, not an older plan from a previous employer. Also, while you avoid penalties with these strategies, you still have to pay taxes on those withdrawals.)

Fixed income.

One example is real estate rentals. Certainly, there are downsides to being a landlord, but those who manage it right and carefully screen tenants may find this can provide a reliable income. Owning rental properties can come with tax advantages. Beyond that, the property’s value typically appreciates in a strong market, making it a potential long-term investment. If need be, you can sell it later in life to pay for such expenses as healthcare or long-term care. If you don’t like the idea of handling upkeep and dealing with tenants yourself, you could hire a property management company, but that adds to your expenses.

Guaranteed income.

It’s important in retirement to have some income that arrives each month, regardless of what’s happening in the market. The most common source of guaranteed retirement income is Social Security. For those considering early retirement, you can begin drawing Social Security as early as age 62. But there’s a caveat. If you claim the benefit before you reach full retirement age (66 to 67 for most people), your monthly benefit is reduced for life. Another source of retirement income some people still have is a pension. If you have one, determine whether it provides a reduced benefit (or any benefit at all) to your spouse after you die. If not, you may want to weigh whether to take a lump-sum payment rather than your regular payout, if that choice is offered. Finally, an annuity – either fixed or indexed – can provide you with a monthly check as well. Some annuities come with fees, rules and limitations, and you also want to research the claims-paying ability of the insurance carriers being considered. So study them carefully before making a decision.  A financial professional can help you figure out what’s best for you and your circumstances.

Speculative income.

A risk of retiring early is that you are even likelier than the average person to outlive your savings. That means you may want to keep at least a portion of your money in the market so it can grow. Yes, that means you could experience market volatility, but historically, after significant market drops, the market has strong recoveries. Still, you and your financial professional should take steps to minimize your risk exposure.

Finally, with retirement comes extra time, and how you use that time could make a difference in your financial situation. Maybe you could take a part-time job to pull in extra cash. Perhaps a favorite hobby could turn into a money-making venture. Or possibly you just need to be cautious about becoming bored and filling that extra time with too many trips or shopping sprees, spending money you really can’t afford.

Even with careful planning, early retirement can still be difficult for some people. If that’s the case with you, you may need to adjust your lifestyle accordingly.

Regardless, it’s important in retirement – early or otherwise – to have an assortment of income sources. With the right amount of diversity in your portfolio, you may be able to live well in early retirement now, while still growing a nest egg that will see you through your later years.

Alan Becker, who wrote this article, is president of Retirement Solutions Group (www.rsgusa.net)  and author of “Return on Investment or Reliability of Income? The True Meaning of ROI in Retirement.”