Debt is becoming a growing problem in retirement. But like nearly everything else in life, it’s less of a issue if you have a plan.
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 age 75 and older, the rate more than doubled, from 8.4% to 21.2%.
And the Employee Benefits Research Institute (EBRI) says U.S. families carrying the highest levels of debt were those with heads of household aged 55 to 64.They had an average debt level of $107,060 in 2010.
For an age group nearing retirement, that’s not a good thing. And that may be why Baby Boomers’ confidence in having sufficient savings to last through retirement dropped to a five-year low in a survey released last week. That survey, from the Insured Retirement Institute, says only 27% of Boomers are highly confident that their savings will last.
And debt can cause additional stress and lead to health problems, says Janet Taylor, a New York City psychiatrist and consultant with AARP’s Life Reimagined.
“The amount of debt and specifically large debts which “are hard to imagine paying off” directly contributes to symptoms of depression and chronic stress both of which may lead to poorer physical and psychological outcomes,” she says. “The stress of debt can worsen every chronic medical illness.
“Debt also impacts the quality of relationships and feelings of self-esteem and self-stigma,” she says. “Retirees who are trapped by debt may feel guilt and shame about not being able to help their children financially or are ashamed to ask for appropriate help from their resources. Life circumstances such as an unexpected death or job loss may create strain and require professional advice for their finances and mental health.”
Many financial planners prefer that people enter retirement with little or no debt. And if retirees do have debt, most suggest they figure out how to pay it down — or off — before they retire.
“My focus is to always reduce or eliminate any debt, if you can, prior to or after you retire,” says Gretchen Cliburn, senior managing adviser at BKD Wealth Advisors inSpringfield, Mo. “Debt increases stress and reduces lifestyle options.”
“People need to plan a little earlier,” says Melissa Richey, vice president of Fragasso Financial Advisors in Pittsburgh. “I just talked to a woman who is 64 and never did any planning. She got laid off. She wants to know if she can retire. We have to tell her no. You may have to go back to work. That’s the honest truth.”
“This is something that we deal with every single day,” says Ron Weiner, founder and president of RDM Financial Group in Westport, Conn. “‘Debt’ to a lot of people is an emotional word. It is not an emotional word, it’s a number. And it’s a quantifiable number as to whether you should have debt. It takes a little work to find out if certain debt is good for you. And if you are unemotional, you can make a pragmatic and meaningful decision.”
Financial planners talk about “good” debt and “bad” debt.
“If you have a lot of debt in retirement, try to get rid of the bad debt first,” says Richey. “Start with credit cards. Pay more than the minimum amount. That (credit card debt) does nothing for you. You don’t get a tax deduction and the interest rates are high. Then consider paying down your mortgage.”
Thomas Anderson, author of The Value of Debt in Retirement, says there are actually three kids of debt.
“The first is oppressive debt,” he says. “It has a rate higher than 10% — credit card debt or payday loans. If you have a credit card with 15% interest and you pay that off, you have a guaranteed rate of 15%. I’m against oppressive debt. I want people to get rid of that as fast as they can.
“The second is working debt,” he says. “That includes mortgage debt, at 3%, 4% or 5% interest, and a CPA tells me it is fully tax deductible. I may not want to pay that down.”
“The best debt is enriching debt,” he says. “It’s debt you are choosing to take on, but you have the money in the bank and can pay it off if you want to.”
Mortgage debt can be the biggest issue for retirees and planners are mixed on whether you should pay off your mortgage or keep it for the tax benefits. In any event, many see mortgage debt as good debt because of the tax benefits. It depends on your personal situation.
Weiner, whose clients are high-net worth, says most of the people visiting him are not retiring with debt. But some are overly obsessed with not having debt.
“We have people who have money in retirement plans and buy a second home and want to pay cash because they don’t want to have debt,” he says. “What they don’t understand is to take money out of a retirement plan, they have to pay taxes. Also, they don’t let that retirement plan grow. People are too short sighted. Mortgage money tends to be way to emotional when it’s a pragmatic decision. Retirement funds should be kept as much intact as possible.”
Jamie Hopkins, associate director at the American College in New York, says most people enter retirement with debt. Mortgage debt is the main debt source for people going into retirement he says — an average of $100,000, “which is a lot.”
“Most people will not have extra cash sitting around to pay off debt,” he says. Most will go into retirement with some debt — housing debt or credit card debt. We will see more people entering into retirement with student loan debt. That has become the No. 2 debt source.”
Weiner says student loans are a growing problem — mostly retirees taking on student loans for their children and grandchildren.
“It’s very emotional,” he says. We hear people say, ‘But it’s my grandchild,’ or, ‘It’s my child. What am I to do?’ That’s emotional. In retirement you can’t make it back and mistakes are much more pronounced. Younger folks have time to make up for it. But for retirees in their 80s and running out of money, it’s not just emotional, but it impacts their health. These are hard decisions.”
“Retirees need to be careful about assuming the debt of their children,” says Richey. “Most parents want to help their children in any way possible,but it shouldn’t be at the expense of their own retirement. Once retired, income sources are limited and retirees need to budget carefully and discuss their situation with their children.”
Hopkins says the key is if you have enough income to meet your debt obligations in retirement.
“If you don’t, we need to readjust your retirement plan. It might not be the time for retirement,” he says. “Maybe you need to work longer. You might increase your Social Security benefits and pension for another year, and you have the income from work for another year. You can also pay down your debt for another year.”
He says downsizing is another option.
“More retirees have debt than 20 years ago,” he says. “Having debt is not necessarily a bad thing — it’s just if you’re prepared for the expense, if you have enough income. Debt in itself is not a bad thing, but not being able to meet your debt and the other life issues is. You need to plan for that challenge.”
“We always recommend that especially clients with debt create a spending plan,” says Cliburn. “They choose how to spend their available resources based on what’s most important to them. By planing ahead, they will make better decisions and reduce the chance of creating additional debt.”
“People need to plan much earlier in life,” says Richey. “Get a financial planner, someone who can look at your whole situation.”
USA TODAY retirement columnist Rodney Brooks is the author of a new e-book, Is One Million Dollars Enough? A guide to planning for and living through a successful retirement. The book is available at major online bookstores.
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