A Look at Living with Debt in Retirement
A growing number of seniors are carrying debt with them into retirement. What are the implications?
According to the Consumer Financial Protection Bureau, the percentage of homeowners 65 and older with mortgage debt increased from 22% in 2001 to 30% in 2011. Among those 75 and older, the rate more than doubled from 8.4% to 21.2%.
The Employee Benefits Research Institute reports that households aged 55 to 64 have the highest level of debt of any age group, with an average debt level of $107,060 in 2010. It can be farly certain that a lot of this debt will follow these people into retirement with them.
Interestingly, seniors are also struggling with student loan debt. According to US Today, over 67000 seniors are seeing Social Security retirement checks being garnished to pay for student loans! That is scary!
So what about debt in retirement? Is it always bad? Is it ok to bring some debt into retirement with you?
Well, the answer (as with so much else in personal finance) is that it depends.
Being debt free in retirement is ideal. In fact, we never like carrying non-mortgage debt, but debt in retirement presents another level of risk. When we buy something on debt, we are committing to using tomorrows income to buy something we want to have today. But once we retire, our day to day living expenses will likely eat up all our retirement income. There is rarely income left over to pay for yesterdays splurges! The only alternative is to withdraw from savings to repay debt. But you likely need these savings to pay for tomorrows expenses. So carrying debt makes planning for a successful retirement difficult – sometimes impossible!
We do allow for some exceptions to the “no retirement debt” rule.
Mortgages in Retirement. For individuals who want to (and can afford to) buy a home but who do not have a lot of after tax savings, we will sometimes recommend limited use of mortgage debt in retirement. Not that we like debt, but if the alternative is withdrawing a big sum from an IRA and incurring a big tax bill – then we may prefer to accept the debt as part of a well thought out retirement plan. Likewise, if a client has a relatively small pool of “after tax” money – we may want to preserve that pool of resources for emergencies and opportunities rather than lock it up in a home.
Reverse mortgages. Every time I mention this to clients the response is a cringe and “I’ll never do that!”. But reverse mortgages used properly can be a useful tool. And if one shops carefully, products have improved dramatically in recent years, with dramatically lower up front costs. I would rather see seniors with a reverse than credit card debt or car loans – and I sometimes prefer them to conventional mortgages!
Student Loan Dangers! Parents need to be very cautious about taking on debt for college – including borrowing against the home and cosigned private loans. As you near retirement, income becomes more uncertain as health issues and corporate downsizing both seem to target older workers. This means that the income you need to repay money you borrow for college may not be there. However, the debts will be! There is only one way to get out of college debt – and you don’t want to go there. (hint: bankruptcy doesn’t work for student loans…)
If you have debt you want to eliminate before retirement, I have several suggestions.
- Learn to budget effectively. Use of apps and online tools like everydollar.com make budgeting far easier than it used to be. But you can do it with pencil and paper as well.
- Make debt elimination your top priority. You need to attack this with gusto, like your house is on fire. Because your (financial) house IS on fire! If that means skipping vacations, eating our, and switching to basic cable – so be it!
- Use the Debt Snowball technique. List all your non-mortgage debts, smallest at the top. Pay the minimum on all but the smallest, then use every available dollar to put toward the smallest debt until it is gone. That frees up more dollars (what you used to pay on that now-paid-off-debt) to put toward the next smallest debt, and so on!
Need help with a strategy for eliminating debt and planning for retirement? Setup an appointment with our Certified Financial Planners or Financial Coaches today!