Most people approaching retirement age probably dream about retiring debt-free. Entering retirement without the burden of debt is certainly the ideal – but if you think it’s the norm, think again. The reality is, about seven out of ten households headed by those in the 65-74 age group are carrying at least some debt load, and for those 75 and older the picture isn’t much better.
Reduce Debt Load Before You Retire
Last year we discovered this article on the financial website NerdWallet, and we’re bringing it back to your attention because the message is highly relevant. Written by columnist Liz Weston, the article describes just how common it is for seniors to retire with a debt load, and it also lists three helpful ways to reduce that debt – or at least to manage it better – ideally before you stop working entirely. “Managing Debt in Retirement Takes Some Planning,” reads the title of the article, and based on our experience here at AgingOptions that is certainly true. Not only is it sad to see how many seniors are entering retirement with woefully inadequate savings (something we also wrote about last year in this article on the AgingOptions blog), but it’s doubly tragic when poor borrowing habits have buried these same seniors under a burdensome debt load. The result is a lifestyle in retirement than is bare-bones, to say the least.
“Owing money in retirement isn’t ideal — but most people do,” Weston writes. “Seventy percent of U.S. households headed by people ages 65 to 74 had at least some debt in 2016, according to the Federal Reserve’s latest Survey of Consumer Finances. So did half of those 75 and older.” This debt can be from all sources: credit cards, car loans, even student loans for children and grandchildren. But the biggest debt, and the toughest to handle, is usually the home loan. “Mortgage debt, especially, can be a huge burden in retirement,” Weston says, particularly when living on a fixed income. “Retirees may have to withdraw larger amounts from their retirement funds to cover payments on debt, which can trigger higher tax bills and increase the chances they’ll run short of money.” In other words, a heavier debt load compounds an already fragile financial situation.
Three Suggestions to Reduce Debt Load
The best bet, says the NerdWallet article, is to deal with debt while you still have a paycheck. “People have the most options to deal with debt if they create a plan before they retire, financial planners say. Refinancing a mortgage, for example, is usually less of a hassle while people are still employed.” You may even find you have more opportunities to earn extra income while you’re younger, income that can go toward paying off debt. If you’re approaching retirement, Weston advises, you might consider these three suggestions in order to tackle your debts and reduce or even eliminate them. (Here at AgingOptions, we generally recommend that our clients consult an objective financial planner and develop a well-conceived financial strategy as part of an overall retirement plan, so we hesitate to recommend a one-size-fits-all approach. Nevertheless, the suggestions from the NerdWallet article may be worth considering.)
- Refinance Your Mortgage. Financial experts generally agree that entering retirement with a paid-off mortgage is best – but it may not be feasible. What’s more, if paying off your home means depleting your retirement accounts, it might not be the best choice. One option, says the Weston article, is to downsize – sell your home and use the equity to buy something smaller. Another idea that’s worth a look, says NerdWallet, is a classic “re-fi” as a means to lower your payments and make the debt easier to manage. If you qualify, a reverse mortgage is also worth a look.
- Consolidate Your Debt. “People with good credit scores, and sufficient discipline, can use zero-percent balance transfer offers to consolidate and pay off their credit card debt,” says Weston. Another option is a personal loan with a fixed interest rate and fixed payments – pay off your balances and manage a single payment. But if paying off your debts in this way would take more than five years, your debt load may be unmanageable, Weston suggests. “In that case, they should talk to a credit counselor and a bankruptcy attorney to better understand their options.”
- Consider a HELOC. The familiar home equity line of credit can be a viable choice for those uneasy about a reverse mortgage. “A home equity line of credit is like a credit card that allows you to borrow against the value of your home,” explains the NerdWallet “If that sounds dangerous — good. It should.” A HELOC should never be used for frivolous spending but it’s worth a look as an emergency fund or to fund home repairs. (There are plenty of articles online comparing the pros and cons of reverse mortgages versus HELOCS. Here’s an example that seems objective, on the Investopedia website.)
The Bottom Line: Watch Your Bottom Line!
If there’s a bottom line to this article, it’s that retirees and those about to retire need to pay special attention to the pitfalls of debt, and do what they can to reduce or eliminate it. A mortgage refinance, a debt consolidation loan or a home equity line of credit might all be options worthy of a look – but we at AgingOptions want to add two important pieces of advice. First, we encourage you to talk with a fee-based financial planner who can help you develop a financial dashboard that takes into account all the critical “financial gauges” that impact on your retirement plans. Second, don’t confuse a financial plan with a retirement plan: they’re not the same! A truly comprehensive retirement plan blends your finances with the other vital facets of retirement, including legal protection, housing options, family communication and medical coverage. There’s only one plan we know of that accomplishes this synergy: a LifePlan from AgingOptions.
We invite you to get the facts about this retirement planning breakthrough by joining Rajiv Nagaich at an upcoming LifePlanning Seminar. These popular events are information-packed and absolutely free. Bring your retirement questions and come prepared for an entertaining and eye-opening 90 minutes with Rajiv. For a current calendar of seminar dates and locations, visit our Live Events page and register online, or give us a call.
Managing your debt load is important in retirement – but it’s only one piece of a larger puzzle. We’ll be glad to show you how the pieces fit together at an AgingOptions LifePlanning Seminar.
(originally reported at www.nerdwallet.com)