Portfolio Perspectives

Managing The Gravity Of Debt

When clients hit a rough patch, you need to be on your game

by Jeff Jackman, ChFC, RICP, CLU

Mr. Jackman is a Wealth Management Advisor with Northwestern Mutual Wealth Management Company. Visit www.northwesternmutual.com.

Has this happened to you?

A client you’ve worked with for some time enters your office, looking for help. The client is a sound planner but has hit some financial challenges. The bills are piling up. The stress is mounting. Worried about finances, the client is considering taking on more debt to ride through the difficult patch.

Unfortunately, this situation is more common than we’d like. With markets dropping, inflation rising and uncertainty rippling through the economy, many sound planners are facing some strong headwinds.

Undoubtedly, it’s against most people’s better instincts to take on more debt, but sometimes they don’t feel like there are better options.

As an advisor, it’s your job to do two things in these situations: make sure your client understands the implications of adding more debt, and explore whether there are other options that will be less of a drag on a long-term plan.

The Gravity Of The Decision

Managed carefully, debt can be a useful tool within a financial plan. But it’s a slippery slope between healthy debt and runaway debt. And once it gets a little out of control, things can spiral quickly.

More than half of people say debt is having a substantial or moderate impact on their ability to reach financial security, according to Northwestern Mutual’s 2022 Planning & Progress Study. And debt is causing people to hit pause on life’s milestones, like saving for retirement, buying a home, getting married and having children.

For many clients, debt can snowball. Once people establish in their mind its “ok” to have debt (especially consumer debt – think credit cards), it makes it easier to take on more and more moving forward. This can create a situation where a client’s first instinct is to borrow for what they need. This can be a particularly precarious mindset to carry into retirement because there are no loans for that.

For many clients, debt can snowball. Once people establish in their mind its “ok” to have debt (especially consumer debt – think credit cards), it makes it easier to take on more and more moving forward...

Northwestern Mutual’s 2022 Planning & Progress Study reveals the average American plans to work until age 64, up from 62.6 last year. And more than four in ten people surveyed said they do not expect to be financially ready for retirement when the time comes.

The road to financial security in retirement is a long one. Make sure your clients understand that relying on debt too easily can make that road much longer.

Explore Other Options

More often than not, clients turn to debt when there are better options available.

As a starting point, it’s good to work with your clients so they have a strong sense of how much debt they can realistically take on.

A good rule of thumb is to ensure no more than 36% of gross income goes towards clients’ total debt load, which includes mortgage, auto, credit card, etc. People generally don’t like downgrading their lifestyle, which can create problems if they are considering taking on more debt to keep up with inflation, financial pressure or anxiety. If a client’s debt load is already above that level, it will take more conversations and involved planning.

  • Are there assets not creating much value that can be liquidated? Maybe they have an extra vehicle that could be sold to give them more financial breathing room.
  • Look through the client’s budget to see where cuts can be made. Cutting an expensive monthly subscription that’s not being used might help.
  • Consider repositioning of debt. If the client has enough equity in their home or life insurance policy, a Home Equity Line of Credit or a Policy Loan could be a smart place to borrow money from to pay off high interest debt.

Tread Carefully

We have seen clients come in with significant assets but also significant consumer debt. At a certain point, the compound interest on the credit cards, time shares, or “big kid toys” can start to erode years of good decisions. The sooner clients seek help, the better position they’ll be in to reach a comfortable retirement.

A financial advisor can help you pay down debt while enjoying life in the present.